The Fed could rescue bond markets and still make life harder for Bitcoin

Dallas Fed President Lorie Logan proposed stronger tools to keep Treasury markets functioning during a crisis while leaving room for higher interest rates. Her November 13 remarks separate two potential influences on Bitcoin: relief from disrupted funding and pressure from further monetary tightening.

In the speech, Logan said the Treasury market was functioning very well and presented personal recommendations, rather than announcing an intervention or an adopted Federal Open Market Committee program. She said intervention should be reserved for extreme failures in intermediation; high or rapidly rising yields alone would not justify it.

Her rate outlook points toward further tightening. In November 10 remarks, Logan described current monetary policy as accommodative and called for at least two further quarter-point increases to make it modestly restrictive. She made the pace conditional on developments. The FOMC's October 28 decision had maintained the target range at 3.75% to 4%; her preferred path is distinct from that committee decision.

Her preferred starting point is lending against Treasury securities. The Fed could supply funding at a rate consistent with its monetary-policy target, supporting financial stability while maintaining the interest-rate stance it considers necessary.

Logan also proposed developing central clearing for the Fed's repo lending. Reducing the balance-sheet costs intermediaries incur when passing funding onward could help that money reach the broader market more efficiently during stress.

Purchases would serve a different need. When lending cannot resolve dysfunction, buying securities could free space on intermediaries' balance sheets so they can keep trading. But purchases are harder to separate from monetary policy because they can push down term premiums and stimulate the economy.

Logan suggested holding market-function purchases in a separate account and committing to sell the securities as soon as possible. She argued that purchases expected to unwind quickly should have much less effect on term premiums than holdings kept for years. That would limit the unwanted stimulus, rather than guarantee its elimination.

Two channels from the Fed to Bitcoin

For Bitcoin, the implication is conditional. Restoring disrupted Treasury funding could improve the environment for risk-taking. Yet further monetary tightening could still weigh on crypto risk appetite, even if the financial system were functioning more smoothly.

An August 2023 IMF working paper supplies historical evidence for that second channel. It finds that US monetary tightening reduces a common crypto price factor through risk-taking, resembling the transmission to equities. That aggregate finding is not a forecast of Bitcoin's response to Logan's proposals.