© Reuters
Investing.com – Cryptocurrencies have been lagging in recent months, but could now benefit from the Fed’s hawkish policy according to renowned economist Mohamed El-Erian, of Allianz (ETR:).
During an interview with CNBC yesterday, the economist discussed the US economy, markets and the Federal Reserve’s response to inflation, as well as the impact on the and other cryptocurrencies. .
“I think the markets have understood that we have three problems. The first is that we have persistently high inflation. Second, the Fed is very late, and third, the path to orderly disinflation is quite narrow,” he explained.
Because of these factors, the economist said companies are now asking questions about growth. He noted that investment bank Goldman Sachs (NYSE:) said on Monday that the probability of a recession in the next two years was 35%. “That’s a significant number, 35%,” El-Erian pointed out.
“So the big question is, can we navigate this inflation-growing landscape that has become much more difficult?” he noted, adding that “bank CEOs are worried about the macro environment.”
Liquidity impact vs diversification impact
Regarding the long-term outlook for the cryptocurrency market, in light of the market downturn in recent months, El Erian said:
“I think the concern for cryptocurrencies is that this drop is happening at a time when is up and almost hitting $2,000. Because the big argument for crypto is that it’s a diversifier. In times inflation, that’s attractive. And recently, crypto hasn’t played that role.”
The Economist explained, “There’s a reason for that, and it’s because crypto, unlike gold, has benefited tremendously from all the liquidity injections. So what you get in crypto is a a tug of war between the recognition that liquidity comes out of the system as a whole and the appeal as a diversifier. So far, it’s the liquidity element that wins out.”
He continued:
“What we’re seeing across the board is the restoration of value, and that’s a good thing. You see it in stocks, you see it in bonds, you see it in crypto. »
“We are simply adjusting to a paradigm in which liquidity is no longer abundant, and is no longer predictable,” he added.
The Fed, the next big bullish factor for Bitcoin?
El-Erian was also asked what would force the Federal Reserve to change its inflation target and what that target would be.
“What will compel them to change their focus is the recognition that by being so late, they cannot achieve their goal and their credibility is at risk,” he replied. “They would also be concerned that by pressing the brakes too hard, they would push this economy not only into a short-term recession but also into a longer-term recession.”
He thus predicted that “They will be very tempted and many people will push them to increase the target from 2% to 3% as a way out. This solution will not be easy to implement and will be incredibly controversial. .”
Finally, when asked what to expect from cryptocurrencies and gold if the Fed indeed acts as he predicts, he replied that “They will both go higher”.