The Fed says nothing and the market does not listen

good morning. Analyzing the communication of the Fed means entering a wilderness of mirrors (to borrow James Angleton's unforgettable expression). What the US Federal Reserve says is largely important because everyone believes that all other faith fed policy is very important. The whole psychological construct threatens to disappear in his own butt at any moment. Nevertheless, we try to sort the latest development below. Send us an email: robert.armstrong@ft.com and ethan.wu@ft.com.

The Fed is not restrictive. What if that changes?

The Fed session last week caused the bond dates and the shares dropped. The almost universal reaction was that the press conference of the FED chairman Jay Powell failed more restrictively than expected and confirmed that the central bench lags behind the inflation curve and wants to get its way. The market now assumes that four to five installments will come this year.

The financial conditions pretended before the meeting, as this diagram shows (axes are arranged in such a way that tighter and more looser means):

Diagramm with the financial conditions ">

Unhedged, however, was a bit skeptical:

We believe that the market reads tea leaves that have not yet been brewed. In his briefing, Powell repeatedly emphasized that the Fed would be "flexible" and that politics will adapt to the economy

We have received a small degree of justification. It seems that the Fed officials try to attract the markets from their disturbance. Here is Bloomberg yesterday:

There are signs that some decision-makers from the US Federal Reserve believe that the markets could overtake with the projected pace of interest rate increases. Four officials spoke [on Monday], each of which emphasized the need for gradual tightening and the need for data -dependent measures. Esther George, President of the Fed of Kansas City, who was one of the political voters this year, said that "unexpected adjustments" were not interested in any interest, while Fed boss of San Francisco, Mary Daly, was not to be disturbing.

The message is multi -part, but not perfectly harmonious. James Bullard, President of the St. Louis branch, said yesterday that he was for increases at the next three meetings (March, May and June) and that five increases were "not a bad bet". But he fended off the idea of ​​an increase by 50 basis points in March and repeated Powells Mantra of data dependency. The general message - that Mr. Markt has to relax - is pretty clear.

The Fed refused to say its new plan because it has none yet. The collective imagination of the market raced with the aggressive possibilities that left this open. That forced the Fed to say: people , yes really , we are waiting for further data. The whole episode shows how carefully the Fed has to calibrate its communication - and how extremely the market reaction could be if the Fed actually communicates the intention to tighten faster.

At Unhedged, we do not know what is necessary to reduce inflation. Perhaps radical measures are required, or maybe the problem will come off itself. We are too stupid to know. But assume that the falcons are right. One of the smartest, Bob Michele of Jpmorgan, believes that the markets do not yet see how far the Fed is behind the curve:

You look exactly in this minute today. You still buy bonds, you still have zero interest rates. . . It is simply not realistic to say [that] If you now make four interest rate increases per year, the Fed Funds Rate is 1 percent, and that will provide growth and inflation counterwind ...

With all the fiscal impulses we see, with the potential for a coordinated global reopening and [with] where inflation is today, 3 percent appear to me.

If the FED ultimately comes to three percent, the bonds will serve significantly, and the stocks could also have problems. Of course, others (for example our esteemed friends Martin Sandbu or Adam Tooze) believe that the Fed will not be forced to act quickly. Would that mean upward potential for bond or stock markets from here? Not necessarily. Politics cannot become much more relaxed than now (unless the economy happens to the economy). At the risk of saying the obvious, the risks from interest rate policy seem to be strongly directed. ( Wu & Armstrong )

The crypto-equity link has worried the IMF

Yesterday we told you that the IMF finds growing connections between crypto and stocks. Today we dig into IMF research, which was created by the economist (and former professional tennis player) Tara Iyer.

Your key table compares before and after Covid-19, how much volatility slosh between crypto and stocks (BTC is Bitcoin; TTH is the stable coin-Tether; rus is the Russell 2000):

Take a look at the first line. This means that the volatility of the Bitcoin price according to Covid explained 16 percentage points more of the volatility of the S&P 500 than before the pandemic. The overall movement was from 1 percent to 17 percent. "Explained" is a slippery word here. This roughly means that Iyer looked at various possible explanatory factors-such as oil prices, bonds and other stock markets-and the Bitcoin movement was the only one to make it 17 percent of the volatility of the S&P 500.

The growing together of stocks and crypto is not shocking because both reflect the general risk mood. But Iyer believes that crypto volume could cause shares and vice versa:

This could be attributed to several factors, including the increasing introduction of crypto-assets in addition to traditional assets such as stocks and bonds in portfolios of private investors and institutional investors in an environment since the beginning of the COVID-19 pandemic and the growing acceptance of crypto assets for payment purposes.

These conclusions look amazing, but should be interpreted with caution, as Iyer emphasizes. The existence and direction of causality is difficult to determine. Josh Goodbody, COO of the cryptofirma Qredo, is skeptical:

The idea that a crypto sale could lead to a kind of sale in shares simply makes no sense. It's a bit like hen and egg - what comes first?

Nevertheless, there are more and more connections between the world of stocks and crypto-Bitcoin futures ETFs, microstrategy shares, crypto mining shares, Takenized Tesla and so on.

Whatever the effects of crypto on stocks, they will first be felt in emerging countries with fragile financial systems. And that worries the IMF. From a recently published blog post:

The stronger association between crypto and stocks is also shown in emerging countries, some of which were leading when introducing crypto systems. For example, the correlation between the returns of the MSCI Emerging Market Index and Bitcoin in the period 2020-21 0.34, which corresponds to a 17-fold increase compared to previous years. ..

Our analysis suggests that crypto assets are no longer on the edge of the financial system. In view of their relatively high volatility and ratings, their increased synchronization could soon be a risk of financial stability, especially in countries with widespread crypto acceptance. It is therefore time to adopt a comprehensive, coordinated global regulatory framework.

Chris Flood from the FT, who interviewed the IMF director, told us from the IWF:

point of view

The threat of the emerging countries was underestimated by the national authorities. They think that El Salvador makes an absolutely catastrophic mistake. And if the IMF is right, it means that it has to rush to rescue.

Our favorite money historian, Brendan Greeley, noticed that the fund's concerns about crypto about the hot money, which can leave chaos, can leave his fears from the emerging countries:

I think [The IMF] is correct, but if we want to take a hard time against hot flows, perhaps the right time was on Bermuda and the canal islands 30 years ago. If we are really worried that the rich move their money out of a cold economy too quickly, there is a lot that we could do against. I am sure that crypto is a large part of the problem, but it is just a part of a larger, older problem.

It is often said that Krypto is living the financial history at warp speed. The crypto stock link is a good example. ( ethan wu )

a good reading

If today's letter has not yet breastfed your desire to read about the Fed, Martin Wolf argues that the US Federal Reserve is far after the curve: "The Fed continues to draw out the punch, even though the party varies into an orgy".