The Breakdown - Wait, Was the Fed Meeting Dovish or Hawkish?

Starting point is 00:00:00 When all is said and done today, you can definitely see the market settling into the same fears it has had for the past couple months. Recession, stagflation, slowing growth, disinflation, global de-leveraging. These continue to be the themes. 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. The breakdown is sponsored by nexo.io, near NFTX. produced and distributed by CoinDesk. What's going on, guys? It is Thursday, May 5th. Happy Cinco de Mayo.

Starting point is 00:00:39 Today, of course, we are talking about the Fed rate announcement yesterday. But before we get into that, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to get deeper into the conversation, come join us on the breakers discord. You can find a link in the show notes or go to bit. dot LY slash breakdown pod. Also a disclosure as always, in addition to them being a sponsor of the breakdown, I also work with FTX. So I feel like it's important always to caveat these Fed shows.

Starting point is 00:01:09 Like why are we spending so much time on the Fed? Isn't it nuts that the market cares so much about what Jerome Powell has to say? The answer, of course, is yes, it is nuts. And there are plenty of people who think that the power the Fed has isn't really about monetary policy itself. Instead, it's about the power of self-fulfilling prophecy. Basically, the Fed is a marketing body that's marketing the direction they want the economy to go. And at least for now, the market obliges. This Fed watching is even more silly in the context of Bitcoin and crypto. Ryan Salem from FTX tweeted yesterday, I remember when Satoshi famously said, and be sure to closely monitor Fed interest rates.

Starting point is 00:01:48 However, all of that said, as we've discussed, the Fed's battle against inflation is easily the dominant macro theme shaping markets right now, so here we are. What happened at yesterday's meeting? We got the anticipated half a percentage point increase in the policy rate, bringing the target range to 0.75 to 1%. The FOMC anticipates that ongoing increases in the target rate for the federal funds rate will be appropriate. Basically, they're signaling an additional 50 basis point increases at the next two meetings

Starting point is 00:02:18 in June and July. The rate increase was a unanimous vote, and the Fed has also begun the process of significantly reduced. reducing the size of their balance sheet. They called balance sheet reduction consistent with the principles they issued in January, and they reaffirmed that their strategy for balance sheet reduction is to allow holdings to roll off the balance sheet. In other words, to not re-buy securities they're holding when their term expires. This will start June 1st, and when it comes to treasuries, it'll be a $30 billion per month reduction for three months and then increase to $60 billion per month.

Starting point is 00:02:50 mortgage-backed securities will be $17.5 billion per month for three months, then increase to $35 billion per month. So let's talk now about some of the themes from Jerome Powell's speech. First of all, inflation skepticism is definitely gone. He said, inflation is much too high and we understand the hardship it's causing. We are moving expeditiously to bring it back down. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses. Powell also discussed the GDP decline. Quote, after expanding at a robust 5.5% pace over the last year, overall economic activity edged down in the first quarter. Underlying momentum remains strong, however,

Starting point is 00:03:30 as the decline largely reflected swings in inventories and net exports, two volatile categories whose movements last quarter carry little signal for future growth. Indeed, household spending and business-fixed investment continues to expand briskly. The labor market has continued to strengthen and is extremely tight. basically they are not putting a lot of stock in that GDP decline as something to worry about. They also see a path to a soft-ish landing due to household and business budgets being in, quote, very strong financial shape with excess savings, substantially larger than the prior trend, end quote. Now, Powell and the Fed may be right that the economy is well positioned to handle tighter monetary policy,

Starting point is 00:04:09 but a lot of people are reading this take on the GDP and this softish landing idea as the new. transitory buzzword. There are some other things going on in the economy that I think might give us pause as it relates to households being in strong financial shape with excess savings. Q4 of last year saw the largest increase in consumer debt since 2007. The rate increased even more in February, when debt levels jumped by nearly $42 billion for a total of almost $4.5 trillion. The February increase adjusted annually was 11.3%, which was way above economist expectations. revolving credit, which includes credit cards, jumped by 20.7% in February to $1.1 trillion. Is that an indication that people are having to use more debt to cover bills and increasing living expenses?

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Starting point is 00:06:44 He said, we don't see a wage price spiral. We see that companies have the ability to raise prices and they're doing that, but there have been price shocks. We know we need to expeditiously move our policy rate up to ranges of more normal neutral levels. We need to look around and keep going if we don't see that financial conditions have tightened adequately, or that the economy is behaving in ways that suggests we're not where we need to be. Still, he also reminded the market of the limits of the Fed's power, saying, our tools don't really work on supply shocks. Our tools work on demand. We can't really affect oil prices,

Starting point is 00:07:13 commodity prices, or food prices. He also sort of basically said what I said previously about the Fed being a marketing body. Quote, monetary policy is working through expectations now to a very large extent. The two year is at 280 now. In September, it was at 20 bips. That's all through the economy. People are feeling those higher rates already. That shows that the markets think our forward guidance is credible. We want to keep it that way. Finally, when asked about demand destruction to get back to stable prices, he said, there may be some pain associated in getting back to that, but the big pain is in not dealing with inflation and allowing it to become entrenched. So a few new Fed-speak words or phrases to keep track of, moving expeditiously. He uses that word a lot. I think the market is taking

Starting point is 00:07:56 this as implying that consecutive 50 basis point hikes are well within their scope. He used soft landing and soft dish landing, giving some room for what that soft landing might be. And they're using the phrase restrictive levels as the new code word for deliberately recessionary rates. So when all was said and done, this meeting was really about price stability. It was about reaffirming that as a mission and also communicating why the achievement of price stability is a prerequisite to a functional and growing economy. Paul Volker, who famously raised rates incredibly high in the late 70s and early 80s to tame inflation, was invoked a number of times, and it seems like Powell's view were the lesson from that is not about crashing the economy intentionally, but about doing the quote-unquote right thing.

Starting point is 00:08:42 Now, one weird thing about this was just how hawkish the market had gotten over the past few weeks. This was not a dovish policy meeting at all. This was a 50 basis point hike the first time they had raised rates by 50 points in 22 years. Still, the immediate reaction of the market was to view it as really dovish because of what Powell said about the possibility of a 75 basis point hike. He basically said they weren't even considering it, and that really put a cap on how hawkish the market viewed this. Indeed, the immediate reaction of markets was to all go up. Nasdaq went up 4%. Bitcoin was up about 2%. But all of those have now basically retraced. Alex Kruger writes, The Dreaded Round Tripper, was hoping rally would last for 10 days rather than 10 hours. Almost all the commentary yesterday was about the 75 basis point thing.

Starting point is 00:09:35 Travis Kling writes, market showing you how off sides it was positioned. All Powell did was take 75 basis points off the table and talked about a softish landing and everything went Rip City. Imagine what happens when they put hikes on hold in the fall. Roberto Pairley, the head of global policy research at Piper Sandler, said the most interesting thing of the FOMC day was Powell's comments that 75 basis point hikes are not being considered. It's very strange for a Fed chair to rule that out, especially with so much uncertainty about inflation. I wonder if he meant to be as definitive as the market read him. In other words, I wouldn't be surprised if the 75 BIP's idea comes back as a contingency in some

Starting point is 00:10:09 future speech, especially after seeing the market reaction. I doubt that Powell intended to diminish expectations for hikes given how concerned he is about inflation. Allcoin Psycho says, by the way, if you want to know how great the Fed is at SciOps, we just had the steepest hike in client since 2000, yet everyone's happy that we're just sort of screwed instead of really screwed. So what about people's predictions for what happens next? Jamie Diamond puts the odds of a U.S. soft landing at 33%, a mild recession at 33%, and severe recession at 33%.

Starting point is 00:10:39 Alex Thomas, a senior research analyst at John Burns' real estate consulting, says Powell sounds confident the Fed can navigate a softish landing by bringing up labor force. participation. But I'm not sure where those people would come from. It seems like demand has to come down to rain in inflation, but the risk of recession is definitely higher this way. When all is said and done today, you can definitely see the market settling into the same fears it has had for the past couple months. Recession, stagflation, slowing growth, disinflation, global de-leveraging, these continue to be the themes. When all was said and done, the Fed meeting seems to have done very little. And so I think you can expect discussion of what Powell's going to have to do next to

Starting point is 00:11:20 to start to heat up pretty soon. Ultimately, the next big thing probably is the next inflation print numbers we get. The market is probably going to react pretty strongly to whether we've plateaued or whether we continue to see a rise. For all of us here in Bitcoin, still kind of blown away that we have to pay attention to what the Fed is doing. I think CoinMamba sums up the emotion pretty well. It's weird that we're all sitting here waiting for the FOMC decision to see which direction crypto will take. I remember the time when Bitcoin used to pump on the news that a flower shop in Cyprus started accepting it for payment. But here we are. This is a global asset in global markets with a lot of buyers who participate in these traditional markets. In the short term, we are all on

Starting point is 00:12:01 the same ride. I want to say thanks again to my sponsors, nexo.io, near NFTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. Hey, breakdown listeners, come join CoinDesk's Consensus 2020, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web3, and the Metaverse, and is designed for crypto newbies, investors, entrepreneurs, developers, and creators.

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The Breakdown - Wait, Was the Fed Meeting Dovish or Hawkish?

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