The Breakdown - Powell: Banks Can Serve Crypto Industry

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Thursday, January 30th, and today we are talking about how the Fed Chair has said that banks can serve crypto customers. Before we eat into that, however, if you are enjoying the breakdown, please go subscribe to it. Give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown. All right, friends. Well, yesterday was possibly the most Nothing Burger Fed meeting in several years when it comes

Starting point is 00:00:45 to monetary policy. Powell held rate steady beginning what could be a lengthy Fed pause. Guidance was minimal as the Fed moves to a data-dependent weight in C mode. But when it comes to the narrative battles currently underway in Washington, this press conference was filled with big signals of change. Let's start, obviously, with Powell's comments on crypto and the first official sign that Operation Chokepoint 2.0 has come to an end at the Fed. Powell said,

Starting point is 00:01:10 Our role with crypto is really to look at the banks. Banks are perfectly able to serve crypto customers as long as they understand and can manage the risks to safety and soundness. A good number of our banks that we regulate and supervise do that. We're not against innovation and we certainly don't want to take actions that would cause banks to terminate customers who are perfectly legal, maybe related to regulation and supervision. This is pretty much as close as we've come to acknowledgement from a banking regulator that

Starting point is 00:01:34 something was going on. And it's certainly the first official statement on crypto risk in several years. For Nick Carter, it was good enough. He tweeted, immense tonal shift, OCP 2.0 over. This is particularly notable because my understanding is that the Fed specifically was the nexus of OCP 2.0. Some extra context here that's worth underlining. By all accounts, the ringleader of OCP 2.0 at the Fed was vice chair for supervision Michael Barr. He resigned in January amid mounting pressure from the Trump transition team, so he was no longer around to carry the policy forward. We never really got much of a sense that Powell cared one way or another about crypto banking customers, but at yesterday's meeting, he had a very carefully worded position on the issue. He also commented, the threshold has been a little

Starting point is 00:02:17 bit higher for banks engaging in crypto activities, and that's because they're so new. If you're making the choice to conduct that activity inside of a bank, which is inside the Fed safety net, you want to be pretty sure that it's safe and sound activity. Coinbase chief legal officer Paul Grewell commented, what I hear Jay Powell saying is, banks are now free to manage any risks from crypto, just like they manage any risks from any other industry. What a change from the last four years. Another interesting point was the way that Powell got into this topic. The question came right at the end of the press conference from a reporter from Bankrate, who was very seriously asking about the financial stability risks of crypto. He referenced recent guidance from the

Starting point is 00:02:53 Financial Stability Oversight Council that identified crypto as a risk. Essentially, Powell was teed up to reinforce this message and reject the pro-crypto pivot from the Trump administration and completely refused to do so. The question also touched on the potential harm to households from speculating on crypto. Powell rightly, I might add, identify that the Fed has no place opining on specific investments. However, he added, you want people to be knowledgeable about the financial engagements that they have, and that's why we have the securities laws that we have. You want households to have the chance to understand the risk that they're taking. I do think it would be helpful if there were a greater regulatory apparatus around crypto. I think that's something

Starting point is 00:03:29 Congress was working on quite a lot. We've actually spent a lot of time with members of Congress working together on various things. I think that would be a very constructive thing for Congress to do. This is about as close as Powell ever comes to endorsing a particular legislative agenda. It seemed pretty clear that the subtext was that disclosure and clear regulations are a far better plan than what's gone on in the past. Powell is obviously very disciplined in what he says at the podium. He's not changing banking regulations in a Fed speech. We're not about to see a wave of crypto banking products launched tomorrow. But this is a clear change in attitude from the Fed and suggest that banks will soon have

Starting point is 00:04:03 a green light to get involved in the asset class. Certainly, it sends a great signal. And in the meantime, they have no excuse to close bank accounts just because you sent money to Coinbase. Please forward that message to Bank of America CEO Brian Moynihan. Zach Vol wrote, Jerome Powell finished the FOMC presser with a mic drop answer to a crypto question that essentially said, yeah, it's cool, we don't want to do anything to stop innovation.

Starting point is 00:04:26 So there you go, great crypto side of this meeting. But what else went on? Well, while crypto was an afterthought, literally one of the closing questions for the assembled media, they were extremely interested to hear how Powell was dealing with antagonism from Trump. During a speech at Davos last week, Trump said, I'll demand that interest rates drop immediately. This was the first rate meeting since inauguration, and coincidentally, the first in the past four months, where the Fed hasn't cut. The press wanted to know if Trump had called Powell up to make that demand and how he's responding to the pressure. Powell said, I'm not going to have any response or comment whatsoever on what the president said. It's not appropriate for me to do so. Public should be confident that we'll continue

Starting point is 00:05:05 to do our work as we always have, keeping our heads down and doing our work. That's how we best serve the public. When prompted to answer directly about any communication with the president, Powell added, I've had no contact. The president interfering with Fed independence is a volatile issue. During his previous term, it was well known that Trump and Powell didn't see eye to eye. Trump even tweeted to demand a bigger cut in July 2019, stating, as usual, Powell lets us down. However, there are some signs that Trump has moderated his position somewhat, or is at least a little more realistic about Fed policy. The quote about demanding an interest rate drop, which was put to Powell yesterday, is actually quite out of context. It came as Trump discussed

Starting point is 00:05:43 the need to bring oil prices down to kill off inflation and get the U.S. industrial economy back on its feet. What Trump actually said was, with oil prices going down, I'll demand that interest rates drop immediately. Trump's post regarding the Fed decision echoed this point, stating, Because Jay Powell and the Fed failed to stop the problem they created with inflation, I will do it by unleashing American energy production slashing regulation, rebalancing international trade, and reigniting American manufacturing. But I will do much more than stopping inflation. I will make our country financially and otherwise powerful again. Trump also said the Fed had done a, quote, terrible job on bank regulation, and that his treasury would least

Starting point is 00:06:17 the way to cut unnecessary regulation. Nick Timmeros of the Wall Street Journal picked up on the change of rhetoric last week, writing, What's different about Trump's calls for lower interest rates today versus during his first term is the recognition that something else, namely getting and keeping a lid on inflation, has to happen to justify lower rates. For Trump, lower energy prices via OPEC production increases are the straw that stirs this drink. Commenting on Trump's post from yesterday, he added, it's a different flavor of monetary policy critique from 2018 to 2020. From the December meeting, Powell took a lot of heat about comments he made on tariffs. During the press conference, he claimed that forecasts about how tariffs would impact the economy

Starting point is 00:06:53 were not impacting Fed decision-making. The minutes of the meeting, however, seemed to suggest that some Fed officials were considering the impact of tariffs. Yesterday, Powell attempted to clear up the record, making it clear that there's still way too many unknowns about tariffs. However, he did explain how Fed staff are modeling the impact of policy like tariffs, mass deportation, and cuts to the federal workforce. Powell said they model, quote, six or seven alternative scenarios, including really good ones and not so good ones. What those do is spark policymakers to think and understand the uncertainties that surround this. Making his point clear, he added, it's one thing to do that to make assessments about what might happen, but you don't

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Starting point is 00:09:25 conducting the five-year review of the monetary policy framework. You might recall the results of the last five-year review, which concluded in the summer of 2020. The Fed announced they would switched to average inflation targeting over the long term rather than a constant target of 2%. The other major policy was less well-defined. It encouraged the Fed to consider minority unemployment rates when coming out of a recession or crisis to ensure the recovery is broad-based. The logic was relatively sound, but many believe these framework changes contributed to the Fed being slow to react to inflation. Powell, however, didn't accept that the change of framework contributed to the policy error. He said, we looked at the inflation as transitory. When the data turned against that in late 21, we

Starting point is 00:10:03 changed our view and raised rates a lot. The framework was more irrelevant than anything else. For this year's review, the Fed is underscoring that the 2% inflation target will remain as is and won't be a topic of discussion. Powell commented, if a central bank wanted to look at changing that, you wouldn't do it in a time when you're not meeting the target. I would not look at changing it. There's just no interest at all in changing it, if I'm being at all unclear. Powell spent a considerable amount of time at the meeting weaving through culture war issues. He was careful not to escalate hostilities with the administration by being defiant, but clearly signaled that the Fed would not be capitulating to the cultural change being forced on D.C.

Starting point is 00:10:38 Powell dismissed Elon Musk's suggestion that the Fed is, quote, absurdly overstaffed, stating, we run a very careful budget process and we're fully aware that we owe that to the public. Regarding the recent executive order banning DEI initiatives within the government, he had a prepared statement stating that the Fed is, quote, working to align our policies with the executive orders as appropriate and consistent with applicable law. When the journalist pointed out that Dodd-Frank requires the Fed to maintain an office of minority and women's inclusion, Powell repeated, consistent with applicable law. Generally, Powell gave the impression that he has no interest in getting into a fight about

Starting point is 00:11:09 social issues with Trump. Every comment was diplomatic, prepared, and limited. Powell isn't looking to take a stand on any of these issues. He just wants the Fed to stick to monetary policy. To that end, he gave some interesting context around the Fed withdrawing from the network for greening the financial system. The NGFS was established in 2017 at the Paris climate. summit, and currently has 114 central banks in its membership. Powell said,

Starting point is 00:11:31 The work that the NGFS does has broadened very significantly, thinking about nature-related risks like biodiversity and things like that. He noted that the organization's stated goal is to, quote, mobilize mainstream finance to support the transition towards a sustainable economy. Powell said, we joined to get the benefit of understanding what other central banks were doing, seeing research and things like that. I think this is just way beyond any plausible mandate that you could attribute to the Fed. I think the activities of the NGFS are not a good fit for the Fed given our current mandate and authorities. Powell did comment that other central banks have different mandates, so tackling climate change might be more within their wheelhouse.

Starting point is 00:12:06 He also insisted that the timing was not political and had been in the works for several months. Now, moving on to the actual monetary policy discussions, there was a big change in the way the Fed discussed the economy in their official written statement. Regarding the labor market, last meeting statement said, since earlier in the year, labor market conditions of generally eased, and the unemployment rate has moved up but remains low. At this meeting, it said, the unemployment rate has stabilized at a low level in recent months, and market conditions remain solid. On inflation, the Fed struck out a sentence that said, inflation has made progress towards the committee's 2% objective but remains somewhat elevated.

Starting point is 00:12:40 The new language simply read, inflation remains somewhat elevated. The Fed uses this statement to communicate a fairly precise view of the consensus of the committee. It does use some coded language, but you can easily track how sentiment changes from meeting to meeting. The market viewed this statement as a hawkish shift and sold off as soon as the statement was released. Once he took to the podium, Powell tried to clarify what was meant by the changes, saying, We did a little bit of language cleanup there. We just chose to shorten these sentences. This was not meant to send a signal other than that we remain committed to meeting our 2% inflation goal sustainably.

Starting point is 00:13:11 Earlier this month, the stock market sold off following the release of very hot labor market data for December. The fear was that a tightening labor market would kick off another wave of inflation. Powell reiterated that the Fed considers that, quote, conditions in the labor market are broadly in balance, and that the, quote, labor market is not a source of significant inflationary pressures. The only piece of forward guidance was a comment that resuming cuts would be predicated on seeing, quote, further progress on inflation. Powell added, The story is there, we're just going to have to see the data. He comes down to 12-month inflation because that takes out the seasonality. We think we see the pathway for that to happen.

Starting point is 00:13:44 He pointed to steady drops in housing inflation and other imputed prices. Powell noted that you can look through the data and see the setup for further improvements on inflation, but added, Being seen to be set up for it is one thing, having it is another. We're going to need to see further progress on inflation. All right, so that's what happened, but what about market reactions? Frankly, market reaction to the decision to pause rates was mild, if not completely absent. When the statement was released, it was viewed a slightly hawkish and drove a slight sell-off. Once Powell took the podium, it became more clear that this wasn't a hawkish pause,

Starting point is 00:14:13 with the Fed chair staying completely neutral throughout. Both the NASDAQ and the S&P 500 were down 0.5% on the day, their smallest daily price move all week. Bitcoin was up 2.5%, largely on Powell's comments on changes to crypto banking rather than anything to do with monetary policy. If you're asking for my predictions, I would say that this seems to be the first of many Fed meetings this year that will likely have minimal effects on markets. Coming into the Fed meeting, double-line capitals Jeffrey Gunlock called this the, quote, most predictable no change in recent years. Following the press conference, he added, market participants take away from this is that the Fed is on hold. What came out of this meeting

Starting point is 00:14:47 was completely expected, not a lot of insight on where we're headed other than it seems a new high has been reached in data dependency. He believes the Fed is settling in for a long and uneventful year, commenting, maximum two cuts this year. I mean maximum. I'm not predicting two cuts. I just think that's the most you can possibly think about. At the present moment, if you made me pick a number, I would say one cut would be the base case. Unless the unemployment rate starts going up, it's going to be a slow process to get to a hurdle to cut rates again. The key takeaway, then, is that this is not a skip, it's a pause, and it could be a long one. Kathy Bostanchett's chief economist at Nationwide said, Chief Powell very clearly indicated that the first phase of rate calibration

Starting point is 00:15:23 is behind us. They're in no hurry to move into the next phase of rate cuts. Dario Perkins, MD of Global Macro at TS-Lombard wrote, Powell yesterday confirmed that policy has moved from preemptive easing, cutting to prevent bad things happening in the future, to reactive easing, cutting when bad things happen. Put another way, Fed policy isn't a reason to be bullish stocks anymore. And the Q&A confirmed that the press are desperate to see a Powell versus Trump bust up in 2025, which is not something they really need to encourage because it will probably happen anyway. On the battle between Trump and Powell, it seems that Fed independence has survived the first few weeks of the administration. U-PEN-Fed historian Peter Conte Brown said, it's already anticipated

Starting point is 00:16:00 by virtually everyone that Donald Trump cannot and will not stop talking about the Federal Reserve, but it doesn't necessarily carry much policy or informational content. It's less what he says about the Fed and more what he does. Those actions so far seem to be tempered by the team around Trump. Someone has clearly explained that bringing inflation down using energy policy is a much sure a way to lower interest rates than tweeting. Earlier in the week, incoming Treasury Secretary Scott Besson confirmed the Fed should be independent. However, he viewed Trump's post as no different to Senator Warren's letter writing campaign to bring rates down, quipping, President Trump is going to make his views known as many senators did. It seems his views haven't changed very much since 2019 when he dismissively

Starting point is 00:16:37 wrote of Trump's attack on the Fed. So far, the attacks have mostly been limited to 280 characters. So, that's it. The Fed is done for now and maybe done for good. The last leg of the inflation fight is in Trump's hands at least for the next quarter. Assets are going to rise and fall on their own merits rather than getting a boost from rate cuts. But, most importantly for Bitcoiners, Powell has told the banks to stop closing your accounts. Not a bad meeting for a nothing burger, but that's where we will wrap the breakdown. Appreciate you listening as always. And until next time, be safe and take care of each other. Peace.

The Breakdown - Powell: Banks Can Serve Crypto Industry

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