How Can the Fed Simultaneously Prevent a Banking Crisis and Impede Rising Inflation?

As the Federal Open Market Committee continues with their two-day meeting, they find themselves facing a crucial decision: should they raise or hold interest rates?

A handful of prominent voices have spoken out in favor of leaving rates unchanged, including Goldman Sachs’ economics team.

Bill Ackman, the renowned Pershing Square hedge fund manager who made a wise wager last year that interest rates would need to increase, took to Twitter and called for a halt.

As Ackman put it, in a single week, the banking system has experienced several significant shocks that erased equity and bond holders in three banking establishments – Silvergate Bank, SVB Financial and Signature Bank. Adding to this disquieting trend was Credit Suisse becoming obsolete, leading to its junior bondholders having their investments wiped out entirely.

Ackman believes that the banking crisis continues to linger with no clear resolution in sight, and raising interest rates won’t do anything to alleviate the issue.

“The @federalreserve should pause on Wednesday. We have had a number of major shocks to the system. Three US bank closures in a week wiping out equity and bond holders. The demise of Credit Suisse and the zeroing of its junior bondholders. Notably, bondholders bearing losses is a new phenomenon as they were protected in the GFC…This banking crisis remains unresolved and higher rates won’t help.”

Tesla, SpaceX, and Twitter CEO Elon Musk, responded to Ackman’s tweet with a call for an even more intense move from the Federal Reserve. According to Musk, the Fed should drop its benchmark interest rate target by at least 50 basis points.

“The Fed should lower interest rates by at least 50bps on Wednesday.” Musk’s tweet read.

Fed needs to drop the rate by at least 50bps on Wednesday

— Elon Musk (@elonmusk) March 21, 2023

Although my opinion may not carry much weight here, I fully agree with Musk. The reason for that is that if we get a rate pause by the Fed, let alone a half point cut, this news could present further bullish conditions for Bitcoin, Ether and other cryptos, since the lack of returns elsewhere and the potential of some cryptocurrencies as safe haven assets will only further boost demand.

So while some will feel a little deflated by the Fed’s decision to keep it simple, crypto investors and in fact most people who are considering right now investing in cryptocurrencies as a hedge against woes in the U.S. and European banking sectors, will have plenty of reasons to rejoice.

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