FED, Ethan Bitcoin, Arthur Burns discussed on CoinDesk Podcast Network


So this week instead of just a deep dive on some topic I haven't had a chance to do yet, we are doing a true weekly recap, looking at the most important stories from the days before and we're going to start with the biggest macro event shaping while everything in markets right now, which was the June inflation numbers which we got on Wednesday. Now if you go back to last month when in the beginning of June we got maze numbers, they kind of took people by surprise. Economists had by and large expected inflation to go down slightly to still be high at 8%, 7.9%, but instead we surprised the other direction, hitting 8.6 in the CPI. In the wake of this surprise markets but especially crypto were absolutely hammered. We're talking Ethan Bitcoin being both down 30 to 40% and other assets going down even more. Remember June ended up being the worst month in Bitcoin's history when it comes to price. Now, when those numbers came in, the fed was widely anticipated to be heading towards a 50 basis point rate hike in June and a 50 basis point rake hike in July. However, at the last minute, the fed started signaling through their preferred channels that they might go up to 75 basis .0 .75% increase in the federal funds rate, and that was indeed what they did. The 0.75% increase was the biggest increase since 1994, and all of that together meant that this month's CPI reports was extremely highly watched. Starting from Monday, The White House was prepping and damage controlling and narrative shifting. Effectively, they were saying expect a really high number, but also just so you know, it doesn't reflect that gas had already been coming down continuously. The argument which they've continued with throughout this week is that the extremes of the number that actually came through was largely backward looking and didn't anymore reflect the reality, particularly when it comes to the price of gasoline. The number that came in Wednesday for the year over year CPI growth was 9.1%. This is the biggest jump since 1981. In addition, the CPI had grown 1.3% month over month. Gasoline, food, and shelter were all big drivers of this increase. Now this certainly reinforced the consensus view that the fed was going to at least stick with their 75 basis point plan. But over the next 36 hours or so, it also increased how much of the market thinks that we're headed to something even more dramatic. By Thursday, the bond market was pricing in more than an 80% probability of a 100 basis point AKA 1% rate hike at the FOMC meeting at the end of July. Keep in mind a week ago there was effectively 0% probability of that showing up in markets and only a 7.6% probability by Tuesday night ahead of the CPI print. Charlie biello pointed out that the last time the fed hiked rates by 100 basis points in a single meeting was 1981. The same time inflation was last above 9% in the U.S.. When a fed governor was asked about the possibility of a 100 basis point rate hike in July, he responded everything is in play. To which Alex Krueger tweeted, guess 100 basis points in July then. Now on top of just this most immediate meeting coming up, expectations of what we're likely to see at the September and November meetings are starting to change as well. Whereas previously, the market had thought that the fall would see smaller hikes of back to 25 basis points or something like that. Those expectations have been revised up significantly. The market is now betting on a 75 basis point hike in September and a 50 basis point hike in November. And good lord the politics around inflation is just brutal for Biden and the Dems. Bloomberg on Thursday wrote Biden calls inflation numbers out of date. Americans disagree. And goes on to say, quote, fed officials took it differently. Federal Reserve bank of Cleveland president Loretta mester said that she had quote not seen any convincing evidence that inflation had turned the corner and fed board member Christopher Waller called the consumer price index report quote a major league disappointment. So will the fed back off. Frankly, it seems unlikely. They are fully on the Jerome Powell is Paul Volcker, not Arthur burns tip. Outspoken investor Bill ackman wrote a long threat about this as well. Quote, implicitly the markets expect a more aggressive fed will push us into recession by year end and then cut rates in response. Fed dot plots from a few weeks ago suggests that the federal funds rate will rise to slightly higher levels remain flat in 2023 with a gradual reduction beginning in 24. After today's move, the disparity between the forward federal funds curve and the fed has widened further. The market appears to assume that the fed will act as it did in the last three recessions by immediately easing when the economy goes into recession. While this seems intuitive, the lessons of the stagflationary periods of the 70s and 80s suggest that different policy response. Today's economic backdrop with high nominal demand limited supply and high inflation is much more comparable to the 70s and 80s experience than that of the last three recessions that are top of mind for investors. Arthur burns legacy is tarnished by his decision to lower rates as real GDP slowed during a period of high inflation. This catalyzed years of massive inflation which was not quelled until Volcker took the federal funds rate to 20%. Burns policy error is well understood by Powell and the fed governors and likely explains their dot plot curves. We believe the fed will keep the federal funds rate at higher levels for longer, even if we enter a recession in 2023 or sooner, and we believe demand will remain elevated, supply will remain constrained, and high levels of inflation will persist. The fed has two blunt tools the federal funds rate and managing expectations. Yearend federal funds projections are beginning to approach where they need to be. Market expectations for federal funds needs to be managed upward beginning at year end, and for the next 18 to 24 months. Markets remain dismissive of dot plots in recent statements by fed governors on the risk of allowing inflation expectations to become unanchored. I expect the market will adjust federal funds expectations upward as the fed provides more clarity and emphasis on the need for higher rates for longer, and when market participants carefully review the 70s and early 80s precedents and their comparability to current economic conditions. The reason it's worth reading this whole thing is one, it actually gets at the nut of what I think the fed is thinking about, which is this comparison to the 70s. And two, because in many ways, people like Bill ackman saying this out loud gives them effective cloud cover from Wall Street to continue on this path. In times like these, security of your assets should be your number one priority. If you want to offset risk as much as possible and still stay in crypto, you need a trusted partner by your side. Nexo is

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