Fed Officials Discuss “Expanded Use of Cryptocurrencies” in FOMC Meeting, Tapering Warning Sends Markets Tumbling

The dollar has trended upwards to 93.5, last seen in early November, and gold is also creeping closer to $1,800 per ounce, while riskier assets - the stock market, Bitcoin, and Ether are experiencing a drop.

Cryptocurrencies made it to the Federal Reserve’s close-doors seminal monthly meeting in July, where they discussed the lack of transparency associated with stablecoin and the need to develop an appropriate regulatory framework to address the financial stability risks.

“Some participants cited various potential risks to financial stability including the risks associated with expanded use of cryptocurrencies,” reads the minutes of the July 27-28 meeting of the Federal Open Market Committee (FOMC).

Crypto is certainly on the regulators’ radar, especially after the industry held up the $1 trillion Infrastructure bill in Congress this month.

Now, according to the minutes, the officials remain a bit concerned about stablecoins and highlighted the need to regulate to them while noting the

“fragility and lack of transparency associated with stablecoins, the importance of monitoring them closely, and the need to develop an appropriate regulatory framework to address any risks to financial stability associated with such products.”

Appropriate To Start Reducing

Cryptocurrencies weren’t all that Fed officials talked about; the main talking point for the meeting was actually the tapering, which sent the markets sliding down. Spiking Delta deaths and Taliban capturing Afghanistan is also concerning investors and fueling the risk-off sentiment.

At their July gathering, Fed officials made plans to pull back the pace of their $120 million monthly bond purchases likely before the end of the year, indicated the meeting minutes. “Some” members, as per the minutes, preferred to wait until early next year to start tapering.

However, the central bankers also made it clear that cutting the asset purchase was not a precursor to an imminent hike in rates. The minutes stated,

“Looking ahead, most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year.”

It adds that the economy had reached its goal on inflation but added that though “close to being satisfied” with the progress of job growth, it has not met the “substantial further progress” benchmark the Fed has set before it would consider raising rates.

Markets Take A Hit

The warning of tapering as we get closer to next week’s annual confab of central bankers in Jackson Hole resulted in the Dow snapping its five-day winning streak while S&P 500, down 0.7%, suffered its worst day in a month. Disappointing retail sales data didn’t help matters either.

Meanwhile, the dollar went up 93.5, last seen in early November — before sliding a bit to 93.35 — crude rebounded, and gold is creeping closer to $1,800 per ounce.

Amidst this, Bitcoin dropped just under $44,000 and Ether below $3,000. The total cryptocurrency market cap meanwhile continues to hover around $2 trillion.

Still, BTC is up more than 53% YTD and ETH 304%, while S&P’s year-to-date gains are mere 17.15%. The precious metal is in the negative for the month at 1.61% and down 5.82% YTD.

The tech-focused Nasdaq had been flat in August, off just 0.1% percent as Treasury yields trade without much direction.

The Fed also talked about “elevated valuations” across asset classes, with some members worrying that easy Fed policy was raising prices and threatening financial stability. Paul Donovan, chief economist at UBS in an investor note said,

“The Fed is clearly moving to join other Anglo-Saxon central banks in scaling back its bond purchases. The question is how quickly, and by how much. The likely timetable is a theoretical discussion at next week’s Jackson Hole summer camp, a decision in the fourth quarter, and action after that.”

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