The Fed will be scary | Finance times

good morning. We look forward to presenting you the third and last collaboration with Adam Tooze from Chartbook tomorrow, this time about the future of Europe. Today Brainard and Bitcoin. Send us an email: robert.armstrong@ft.com and ethan.wu@ft.com.

Brainard's comments and the interest curve

Lael Brainard, who is the deputy chair of the Fed and was reserved in monetary policy in the past, said on Tuesday that a "quick" reduction in the FED record in May could begin. She also made various other false noises. That is a big deal. The bonds rose and the shares fell.

Brainard's hard words ended up in a market that was already very worried that the Fed would tighten the US economy and lead to a large old recession, since the 10-year/2-year return curve is on the threshold. Do we have to worry more now?

start with Brainard's comments for reduction in balance sheet. The conventional idea that the Fed shortens the balance is that this is about an interest increase, but aims at another part of the interest curve. If the FED bonds bonds (quantitative loosening), this presses the interest rates down, promotes lending and expands the economy. The opposite happens when selling bonds (quantitative tightening). Therefore, the transition from QE to QT should have the same economic impact effect of an interest rate increase and lead to an increase in long -term interest.

But as we have pointed out at this point, we don't know if it works. How the Federal Open Market Committee undertakes the point in the protocol of its December meeting:

There is less uncertainty about the effects of changes in the Federal Fund Rate on the economy as about the effects of changes in the balance of the Federal Reserve

How much less certainty? Now that the last time the central bank tried to reduce its balance sheet, 2018-19, the 10-year returns fell the opposite of what traditional theory predicted.

This brings us to the non-traditional way of thinking about QE and QT (which we have already discussed here several times). From this point of view, the most important direct impact on liquidity lies on the interest. Qe pushes money into the system, Qt pulls it out. When more money spills in the system, people like very speculative systems and secure facilities such as treasuries less. The opposite is the case if there is less money in the system. Paradoxically, the Fed creates a demand for government bonds by selling it and lowers interest. Meanwhile, it is unclear what effects the liquidity change on the real economy has.

This is all strange, but very likely true. I only repeat all of this to emphasize that we do not really know what the Fed balance of Brainard's comments-the part that cited the headlines. Everything we really know is that the Fed wanted to signal and louder that politics will soon tighten it, with all the means that it has available. And this should be feared that we will attract directly to a recession.

People who believe that we should not worry about the signal that is sent by the almost reverse 10-year/2-year curve are happy to point out that the 10-year/3-month curve, from the scientist, still exists. Here again a diagram of the two curves:

The 10/3 month is wide. So no recession?

Think about why the 10-year/3-month curve is usually the more meaningful recession indicator. Perhaps because this curve only reverses when the market expects the Fed to quickly raise interest rates - by striking the brake to the economy instead of slowly going from the accelerator pedal. In other words, as James Athey emphasized from ABRDN towards me, the difference between the 10-year-olds/2-year-olds and the 10-year/3-month bonds reflects the market expectations about how quickly the central bank will raise interest rates. The 10/3 month is now far because the market assumes that the Fed will gradually raise interest rates.

But the Fed begins to signal that it actually has to step on the brake . Brainard's message does not yet understand three -month returns, but it could only be a matter of time. You should worry about a recession this morning than yesterday morning.

Freedom money and Bitcoin decoupling

The march of crypto in the Mainstream continues. At an industry conference in Boca Raton, Florida, Sam Bankman-Fried, CEO of the FTX crypto tour, explained his pitch on how his technology could redesign the US futures markets, and repeated earlier calls to work with the regulatory authorities. From the newly published report of the FT:

ftx takes into account regulatory matters. Bankman-Fried has already proposed the congress to make the CFTC the regulatory authority for all digital assets on the US spot and derivative markets. With its proposal to the CFTC, the FTX urges its preferred regulatory authority to act, which could determine important traffic rules for dealers.

"We would like to have more clarity about the right way to licensing and registration for digital assets," says Bankman-Fried.

Many bitcoiners do not want regulatory entertain. You want war. I have written about the view "Bitcoin as money of freedom" before. The idea is that Bitcoin is essentially about security - in the sense of individual control - and the bypass of state power. Last Friday, the Ethereum founder and early Bitcoin supporter Vitalik Buterin published a contribution in which he worked out the perspective of freedom money. A stylized summary of his argument:

• governments and banks control access to the financial system and sometimes act out of purchasing, stupidity or apathy.

• There should be technology that enables people to transmit values ​​regardless of these purchased/stupid/apathetic gates.

• For this purpose, the technical designs of Bitcoin and Blockchain maximize individual control, at the expense of the lightness and costs of the completion of transactions.

• The meaning of Bitcoin's intolerant culture is that Bitcoin focuses on safety and resisting the suction of the mainstream.

• The restricted usefulness and intolerant culture of Bitcoin is worth it.

So that Bitcoin is "a light in dark places when all other lights go out", it has to oppose the mainstream and bear the costs of its rigidity.

The libertarian ethos that Bitcoin first drove beyond an obscure computer science project has never completely disappeared, even as people like Bankman-Fried Krypto, steadily crowded into the mainstream. Now it rushes back.

bitcoiners are increasingly seeing evidence that the independence of crypto from the state could be used in practice - from insurgents in Myanmar, refugees from Afghanistan and now the war government of Ukraine. At the same time, frightened events such as Canada's hard reaction to the trucker covering the libertarian. (Fox News moderator Tucker Carlson is a new crypto convert.)

That doesn't mean that Bitcoin has to decouple from crypto. The financial and social pressure that Bitcoin moves into the mainstream is strong. But it could. Butterin and its allies are influential and have a vision that is diametrically opposed by Bankman-Fried. The future of crypto is controversial and most fought among its greatest fans. ( ethan wu )

a good reading

keep an eye on the presidential elections in France. It will be important for the markets.