“Fed Watch” is a macro podcast, true to the rebellious nature of bitcoin. In each episode, we question mainstream and Bitcoin narratives by looking at current events in the global macro, with a focus on central banks and currencies.
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In this episode, CK and I cover Jerome Powell and the FOMC’s policy decisions in depth, analyzing statements from the Federal Reserve, Powell, and other financial experts. We then move on to the chart, starting with bitcoin and dollars, then moving to the Treasury rate. Finally, we discuss the shortage of brewing diesel on the east coast of the United States
Federal Reserve FOMC raises interest rates again
CK and I agree that the importance of the Federal Reserve and the FOMC’s policy decisions to markets is indicative of a very unhealthy economy where central bank decisions are The only game in the market.
The Fed raised interest rates by 75 basis points (bps) to the new Fed Funds target range of 3.75% to 4%. This is not a surprise. Markets had expected the Fed not to change its course at this meeting, despite concerns about global liquidity emerging in the financial system.
Central banks maintain their policy trajectory, but declare softened their hawkish tone. The jump out sentence is as follows:
In determining the rate of future growth within the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags by which monetary policy affects economic activity and inflation. , as well as economic and financial development.”
“Accumulate” is the word everyone is focusing on. What does “accumulate” mean in this context?
The Fed is taking their meeting decisions within the broader scope of their overall tightening program as of March 2022, as well as reviewing their significant global role. The reasons that Powell gave in the press conference that followed were mixed. They want to make their decisions on the whole agenda, but also want to be data dependent on a meeting-by-meeting basis.
Overall, I think their intention is to cause uncertainty. Uncertainty is key when it comes to the end of a hiking cycle. The Federal Reserve’s intention is to cause an economic slowdown to bring demand down to match supply, but they can’t do that if the market is going before the end of the bull cycle.
That’s exactly what we’ve seen over the past few months. I’m sure Powell has mixed feelings about the stock market’s ability to still withstand their rally, with the S&P 500 above what it was at the June meeting spike. That’s three meetings with 75 bps gains, quadrupled yesterday, but the stock market is still higher. He wants a “soft landing” – to achieve their policy goals without causing major damage to the economy – but at the same time their goal is to damage the economy. It was a line of contradictions that they were trying to walk.
The purpose of the last few rallies in the tightening program will not be achieved if the market is foreseeing a deceleration, a pause and then a final reversal. This is where purposeful uncertainty comes in. If the Fed can send mixed messages and leave markets uncertain, the impact of their last few rallies could be more significant.
Chart
The Fed Day charts were moving quickly. I delayed taking the snapshots until 30 minutes after the Fed announcement, but the mixed message from Powell sent them wobbling wildly. I won’t post them here as they are out of date, but you can view them on sliding floor for this volume.
Initial response was broadly consistent. Markets take written statements, including new language on cumulative impact, as dovish pivots. Bitcoin skyrocketed along with stocks and the dollar fell.
However, shortly after Powell began asking questions at the press conference, and with the mixed message detailed above, the market reversed. Bitcoin and stocks go down, dollar up.
One chart that I will include in this companion post to the podcast is a chart of 3-month and 10-year Treasury yields that show the most significant reversals in the curve.
3-month and 10-year Treasury securities, relative to the Fed Funds target range
What you can notice on this chart is that the 3-month yield is going to be higher than the 10-year yield. Also, 10-year yields are very close to being within the Fed Funds target range.
What I’ve been saying for months is that the Fed will keep raising rates until the market forces them to stop. The force that the market applies will come when longer-term rates simply don’t follow the Fed anymore and will move lower, just as we can see with 10-year yields here.
The Fed is admittedly “data dependent”. They told us they were followers, but if you want to know where the Fed is going, all you have to do is look at yields. If the government’s security yields start to fall into the Fed Funds target range, at the next meeting their choice will be: raise rates again and lose confidence that they are in control of any real estate. whatever, or pause, or even do “mid-cycle adjustments” and lower them. Powell has done what he calls a mid-cycle adjustment before. Back in 2019, the first rate cut in July was downgraded as such a move. Then, of course, there were big cuts in the months that followed.
Shortage of diesel engines
There are other things going on in the economy besides the Federal Reserve. There is concern about a diesel shortage in the United States.
To cover this story, I read from a Great article by Tsvetana Paraskova. She presents the shortfall and the reason behind it in great detail.
In short, US refinery capacity is down as some plants are converted to biofuel production and our imports from Russia are non-existent due to crazy sanctions.
In the show, we are skewed because I personally don’t worry about the diesel shortage. It will cause some pain, but the solution is to get over that pain. Higher prices will cause one of two things – or both: higher prices will stimulate more production, or higher prices will cause political changes to allow for higher production.
There is a near-common fear of higher prices, and they are considered “inflationary” at all times. Of course, the high price is not bad if you are a manufacturer. Overall, they’re not bad either. Prices are supposed to be neutral and give you information about the economy. The only changes in price that are net negative are due to changes in the money supply. Since our current economic condition is not caused by money printing but instead by a supply crisis and bad government policies, price increases are necessary to overcome today’s problems.
This is a post by Ansel Lindner. The opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc. or Bitcoin Magazine.
