Bitcoin and other cryptocurrencies fell sharply on Dec. 4, in another sign that Omicron uncertainty, concerns about surging inflation, and firming expectations that the Fed will speed up its pullback of stimulus are feeding a wave of risk-off sentiment.
The crypto plunge comes a day after the Labor Department released its closely-watched jobs report, which analysts generally characterized as a mixed bag. While it showed that U.S. employers added a paltry 210,000 jobs last month, well below forecasts of around 550,000, it also showed the unemployment rate dropping a relatively sharp 0.4 percentage points to 4.2 percent, a 21-month low. The labor force participation rate also edged up 0.2 percentage points to 61.8 percent.
Friday’s underwhelming job creation numbers initially led Wall Street stock futures to jump in early trading, apparently as investors bet it would lead the Fed to slow down on scaling back stimulus, but those hopes faded later in the day as expectations firmed that the Fed would continue with a faster stimulus taper timeline and stocks sank after opening bell. All three major Wall Street indexes ended the day down, with the tech-heavy Nasdaq shedding 1.74 percent, the S&P 500 falling 0.84 percent, and the Dow Jones falling 0.17 percent.
The VIX volatility index dubbed the Wall Street fear gauge, cracked the psychological barrier of 30 on Friday for the second time this week, a level not seen in the prior 10 months and an indication of major market gyrations as investors reacted to Omicron headlines, the new variant’s possible impact on the economy, and the Fed’s uncertain plans to dial back stimulus more quickly in response to surging inflation.
The persistence of upward price pressures and signs of continued labor market recovery have put pressure on Fed policymakers to accelerate their schedule for scaling back, or tapering, the central bank’s $120 billion in monthly purchases of U.S. Treasury and mortgage-backed securities, which have provided a tailwind for risk assets like stocks and crypto.
Federal Reserve Chair Jerome Powell in recent testimony suggested a faster taper than the $15 billion per month reduction that’s currently in place, while acknowledging that it’s time to “retire” the term “transitory” as a description of the current bout of inflation, which hit a 31-year high in the 12 months through October. The Fed currently plans to phase out the bond buys over eight months at a monthly pace of $15 billion, which would conclude the taper in June.
A number of economists have urged a faster timeline, with former Treasury Secretary Larry Summers recommending a five-month taper and Goldman Sachs analysts recently predicting that the persistence of inflationary pressures would force the Fed to double its pace to $30 billion per month, bringing the taper to a close in mid March.
On Friday, Federal Reserve Bank of St. Louis President James Bullard, who favors a March deadline for the taper, suggested that the weakness in parts of the jobs report wasn’t significant enough to push the Fed into a slower rollback of stimulus.
“Except for the headline number, the report seemed quite strong across the board,” Bullard told Bloomberg.
Bullard predicted the unemployment rate would fall below 4 percent by the first quarter of 2022, calling the labor market “very strong.”
The jobs recovery is a key touchstone for the Fed, with the central bank reluctant to pull back on stimulus too quickly to ensure a long economic expansion in order for the labor market recovery to firm up.
The U.S. economy remains around 2.4 million jobs below pre-pandemic levels.