Fed Rate Cut Could Crash Crypto Markets, but Era of Central Banks Is Over: Arthur Hayes

As a seasoned crypto investor with over a decade of experience navigating various market cycles, I find Arthur Hayes’ insights particularly intriguing. His prediction that the Fed’s rate cut could lead to a crash in risk assets, including cryptocurrencies, is a stark reminder of the interconnectedness between traditional and digital markets.

Arthur Hayes, the top investment strategist at Maelstrom and one of the co-founders of BitMEX, has made a strong prediction that risky assets such as cryptocurrencies might experience a significant drop just a few days following the first Federal Reserve interest rate reduction, which is set to be announced on Wednesday.

In a private conversation with CoinDesk at the Token2049 event in Singapore, Hayes stated that while the anticipated interest rate reduction might occur, it could exacerbate inflation and bolster the Japanese yen (JPY), leading to increased caution towards risky assets overall.

Hayes argues that reducing interest rates isn’t wise due to ongoing inflation concerns in the U.S. He explains that the federal government plays a significant role in maintaining elevated price levels. By making loans less expensive, you could exacerbate inflationary pressures,” (paraphrased)

“Hayes explained that one reason is the reduction in the difference between interest rates in the U.S. and Japan. This could cause the value of the yen to rise significantly, potentially setting off a chain reaction where people unwind their yen carry trades.

In early August, the increase in the yen’s strength and the subsequent unwinding of the yen carry trades caused turmoil in financial markets when the Bank of Japan increased its key interest rate from 0% to 0.25%. As a result, Bitcoin dropped significantly, plunging from around $64,000 to approximately $50,000 within just one week, according to data from CoinDesk.

USD/JPY is the only thing that matters in the short-term, Hayes said.

Many experts predict that the Bank of Japan (BOJ) will likely raise interest rates more in the near future, while the Federal Reserve (Fed) adopts a different approach. This divergence in policies could potentially strengthen the Japanese yen even more, prompting investors to reconsider their long positions in risky assets that they have financed using loans denominated in yen.

Hayes predicts that U.S. interest rates could drop down almost to zero, having moved away from their current range of approximately 5.25% to 5.5%.

In simpler terms, Hayes stated, “At first, the response will likely be negative, and the central bank may respond by making even deeper cuts to try to control the crisis. However, I believe reducing rates is a poor decision, but they’ll probably do it anyway, and they’ll reach zero quite rapidly.

Ether bull run ahead

Meanwhile, demand for tokenized Treasuries, an interest-rate-sensitive product, could weaken.

The era of central banks is over

For some time now, financial analyst Russell Napier from Scotland has frequently argued that in an attempt to reduce their debt levels relative to their Gross Domestic Product (GDP), governments of developed nations have effectively assumed control over the money supply. As a result, he suggests that central banks are gradually losing their significance.

According to Napier, governments may choose to create specific amounts of liquidity for industries such as manufacturing and re-industrialization, allowing inflation to remain at a higher level.

Hayes believes the same and sees it as a positive development for the crypto market.

“I 100% agree with that prognosis. The era of central banks is over. The politicians are going to take over and tell banks to create liquidity in specific sectors of the economy,” Hayes quipped.

In various places, you’ll find a mix of both flexible and restrictive financial management strategies, known as capital controls. The unique aspect about cryptocurrencies is that they can be owned anywhere in the world, providing a means to bypass such systems. Hayes emphasized this point.