According to Hayes, a quarter-point hike would cost holders $17 billion more in interest a year.
- Arthur Hayes said that Fed rate hikes are not taking money out of the financial system but rather adding to it.
- He believes a rise in interest on bank reserves and Treasury bills by a quarter point each year would bring in liquidity of about $25 billion each year.
- He asked crypto investors to watch how much fiat money there is, not interest rates.
Higher Federal Reserve rates are supposed to tighten money, but they are giving wealthy investors extra cash to spend on Bitcoin (BTC), real estate, watches, and wine, Flop Labs CEO Arthur Hayes said.
In an interview on Saturday with The Rollup podcast, Hayes made the case that higher rates don’t drain money from the financial system the way many investors believe. Every hike actually adds to it, he said.
How Hikes Add Liquidity
Banks have about $3 trillion in reserves at the Fed, he said, and the Fed pays interest on those funds, Hayes said. Hayes reckons a 25-basis-point hike would add about $7.5 billion a year to bank income.
The same goes for Treasury bills. These short-term US government debt securities pay interest that moves with the Fed’s policy rate. There’s about $7 trillion of them out there, Hayes said. He estimated a quarter-point hike would cost holders $17 billion more in interest a year.
Hayes estimated the boost at about $25 billion per hike. “I estimate that for every 25 basis point hike, you raise $25 billion of extra liquidity,” he said.
Investors Get A Raise
Most of that money goes to banks and wealthy investors, Hayes said. They don’t have to spend it on everyday goods, he added, so they put it into more financial assets. People invest in hard assets to preserve their purchasing power, he said. “You go and buy more of it because you just got a raise from the Fed,” Hayes said.
The effect is most noticeable in economies with a lot of debt, and where borrowing is mostly short-term, he said. In those economies, he said, raising rates to fight inflation ends up adding to it. He cited studies of Brazil in the 1980s as evidence.
The Fed raised its benchmark rate a quarter-point in September to a range of 3.75% to 4%, which was the first hike by the central bank since July 2023.
One more hike before year-end was penciled in by Fed officials.
Quantity Over Price Of Money
Hayes said interest rates, or the price of money, get too much focus in the market. The larger question for crypto investors, Hayes pointed to, is how much fiat money there is and how fast it is growing.
He also brushed aside concerns about rising US bond yields. “The AI companies are building God, and therefore you don’t care what the interest rate is,” Hayes said.
He added that the U.S. government will keep borrowing money as long as it needs to. Hayes said that Europe, and especially France, have a lot more debt than the U.S.
Retail Users Remain Bearish
Bitcoin’s price slipped to $62,100 on early Sunday, its lowest level since August. On Stocktwits, retail sentiment around BTC improved to ‘bearish’ zone from the ‘extremely bearish’ zone, accompanied by ‘high’ chatter levels over the past day. According to platform data, chatter levels have risen over 531% over the pastt week for Bitcoin.
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One user on Stocktwits remained relatively positive saying that the apex cryptocurrency could be “back in the 70s coming week if not monday.”
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Another user called Bitcoin’s recent selloff “Fabricated.”
Bitcoin has been down over 26% so far this year and has lost over 32% in the last 12 months.
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