Core Question

The Fed has recently moved its 2% inflation target to 2029. What does this mean for crypto and other assets?

When did inflation skyrocket?

To understand why we do have inflation above 2% and closer to 3.5%, we have to go back to covid-19. During that time, the government issued stimulus checks, which encourages spending, thus putting more demand on goods where the supply was only barely keeping up, and if anything, the supply was declining. This was the spark that started inflation to be above 2%.

What about today?

Today's inflation is driven mostly by the huge increase in fuel prices due to the Strait of Hormuz still being restricted. Especially since oil is used for everything from your motor vehicles to your clothes to your everyday plastics. Oil is in everything simply put. And so with about 20% of the oil being cutoff from the world supply chain, this has really put a huge price increase in a lot of goods, thus high inflation.

How this impacts crypto

This impacts crypto and other assets usually with a positive result. During periods of high inflation, assets surge. This is because people are looking for safer assets that are not government bonds. 

Now, that might seems contradictory. During high inflation, rates increase, so you get more return. So, why not go with bonds or saving out right? That is because bonds' rates are set the moment they hit the market. So, say you get a 6 month bond at 4.3% interest. With inflation at 3.4%, you get about .9% net gain. 

Now say that while you're waiting for your bond to mature so you can get your money back, inflation rises to 3.8%. Now, suddenly you're only making about .5% net. And, newer bonds are then set with higher interest. So, why buy now if you can wait and get a few more percentage points? That creates a spiral of people waiting and waiting.

And, since these investors don't want to hold onto cash that loses value everyday, they put it into other assets such as crypto, commodities, index funds, and stocks. This drives the price up while existing bond holders who are operating at say .2% net profitability will sell their bonds and buy these assets. And with a ton more selling than buying, bonds drop in value, while other assets rise.

How does the inflation target being moved back affect all of this?

When the Fed moves back its target, that signals to investors that inflation is unlikely to cool down in the short to medium term. This reinforces the idea we talked about above, investors waiting for stabilization. 

So, are bonds still a good buy?

Short answer is yes, US bonds are among the safest bonds out there. The people who actually do all of this micromanaging and closely following global and US news are high net worth individuals or corporations that try to maximize their earnings no matter what. But for you as a regular investor, you can still buy bonds and it is still worth it. Of course, crypto is good too, but consider diversifying and adding some bonds into your portfolio.