The Breakdown - What Jerome Powell’s Second Term Means for Bitcoin

Episode Date: November 24, 2021

This episode is sponsored by NYDIG. This week, after months of speculation, President Joe Biden has named Jerome Powell to a second term as Federal Reserve chairman. His most likely alternate, Lael Brainard, was promoted to vice chairwoman. On today’s episode of “The Breakdown,” NLW looks at why full employment remains at the centerpiece of the Fed agenda even as the nominations herald a narrative pivot on inflation. He also discusses the likely impacts to bitcoin, stablecoins and crypto more broadly.  NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Dark Crazed Cap” by Isaac Joel. Image credit: Alex Wong/Getty Images News, modified by CoinDesk.

Bitcoin in particular, but also some other cryptos, are increasingly perceived as safe haven assets, where their fixed supplies or predictable inflation schedules stand in contrast to central bank fiat money. And as many people as there are that dismiss that take, the people who believe it, which is a growing number, set a price floor that increases over time. Fed policy could have very different and potentially countervailing impacts, given that some are seeing Bitcoin and crypto as a safe haven, and for some, it remains just, a risk asset alongside any other risky bet. 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 Nidig and produced and distributed by CoinDask. What's going on, guys? It is Tuesday, November 23rd, and yesterday, after tons of waiting, we finally got the decision that the markets have been waiting for. about who will be the next Federal Reserve Chair. Now, the two candidates going into this were, of course, Jerome Powell, the man who'd been at the helm of the Fed for the last four years. The pros for Powell was that it would show a steady hand at the wheel.

There would be continuity from this crazy COVID era we just lived through. It would show that it wasn't a partisan thing for the Biden administration. From a political perspective, it would likely be an easy confirmation, and markets were almost sure to like the option that they already knew. Now, the other candidate that was in consideration was Lael Brainer, who was already on the Federal Reserve Board, and who represented New Blood. She's liked by the Progressive Wing for the perception of being harder on corporate regulation. Now, there had been an absolute ton of speculation over the last months, really, but certainly

the last few weeks on who Biden would ultimately choose. And when push came to shove, it was Jerome Powell. Yes, Jerome Powell is getting a second term as Fed Chair, and Braynard is being promoted to vice chair. This is one of the biggest decisions in all of macroeconomics. If you listen to this show regularly, you know how much the market hangs on every decision the Fed makes. Indeed, if you listen to some market commentators like Jeff Snyder, the chief power of the Fed is, in fact, not monetary policy, but their ability to use media and to use public statements and to use guidance to get the market to do what they would want monetary policy to do in sort of a self-fulfilling prophecy kind of way. Certainly for anything regarding risk assets of which Bitcoin and crypto certainly apply at least to most traditional market participants,

how relatively hawkish or dovish the next Fed chair will be, will have a deterministic impact on what's likely to happen for their assets. To understand the considerations here and try to wrap our heads around what it might mean for markets and for crypto specifically, let's look at the primary source documents that we got around it, starting with Biden's announcement speech. First, the speech is a strong affirmation of one of the things that the Fed has been very consistent on. That's the idea that there is growing importance that the Fed places on its mandate around full employment. I've said numerous times this year that there's a weird game of chicken happening. where the Fed says, we're going to hold interest rates low for a longer period of time, even though inflation is rising, and the markets say we don't believe you. We don't believe you're going to be able to do that. The Fed's counter has basically been, look, guys,

our mission isn't just market stability. It's also full employment, and we think there's still a long way to go for full recovery. What's more, it's not just full employment. It's now full employment that's met it out equitably. These are definitely themes that lead right off in Biden's announcement speech. Second, there's a strong theme of affirming the independence of the Fed. In fact, there's a fair number of references to Powell standing up to partisan interference. And in many ways, this is one of the central pillars of testimony to the credibility of the office, which is something that's kind of sorely needed right now, given that there are numerous insider

trading scandals that have been swirling around it. There are mentions of the central bank's role in ensuring the financial system can withstand the impact of climate change, which, by the way, is a little bit different of the tone that we've seen a little bit creeping into the rhetoric of it somehow being the central bank's job to fix climate change, but still no less it's there. And finally, there are, of course, mentions of crypto. Biden discusses regulations needing to stay ahead of emerging risks of, quote, innovation in cryptocurrency or the practice of less regulated non-bank financial institutions. But still, it's clear that there is one really big shift in tone. The transitory talk that has

characterize so much of this year's discourse around inflation is all gone. Indeed, inflation features prominently at the centerpiece of the conversation now. Biden says that the nominees have the skills and tools to get it under control, and they are, quote, in a position to attack inflation from a position of strength, not weakness. To me, it seems pretty clear that the Fed is using this nomination process 100% to pivot to a new narrative of anti-inflation. The Bloomberg headline says as much. Feds Powell and Brainerd stress U.S. inflation battle as priority. In his remarks, Powell said, we know that high inflation takes a toll on families, especially those less able to meet the higher costs of essentials like food, housing, and transportation. We will use our tools both to support

the economy and a strong labor market and to prevent higher inflation from becoming entrenched. Lail Brainerd stressed the same thing, saying, I'm committed to putting working Americans at the center of my work at the Federal Reserve. This means getting inflation down at a time when people are focused on their jobs and how far their paychecks will go. Like I said, a clear shift in narrative tone. But now to reactions. On Wall Street, Bloomberg writes, Wall Street will head into the Thanksgiving holiday with one less worry after President Joe Biden decided to nominate Jerome Powell for a second four-year term as Federal Reserve Chair. Ryan Detrick, the chief marketing strategist for LPL Financial, said, although this decision likely wasn't an easy one for the president, this should be greeted

positively from markets. We know what we will get from Mr. Powell, and this is one less worry now. Mark Lassery, who's a billionaire hedge funder, said, of course everybody was relieved. The markets believe that he will do what is necessary to keep the markets calm and have them move forward. Keep in mind, that probably means being pretty dovish when it comes to interest rates. Still not all the signals from the markets are super clear. Alex Kruger writes yesterday, yields up, curve flattening, inflation expectations sharply down today, tips taking a big hit, financial strong, tech taking a hit, heavy dispersion across stocks. Powell nomination reduces uncertainty, which is bullish, while the market is pricing in a more hawkish fed.

When Kruger was asked if this was bullish or bearish, he said both. Road Ahead will be bumpy, shallower upward slope, and a bumpy ride. NIDIG sponsors this podcast and they are helping banks, corporate treasuries, and fintechs integrate Bitcoin into their products and balance sheets. See why Bitcoin means business at nydig.com slash NLW. That's nydig.com slash NLW. If markets are enthused or at least perhaps relieved with either their champion or at least the devil they know, political battles loom. Quote the Raven gives an interesting statement on the moment saying, no doubt we live in interesting times,

when Jerome Powell, the man who saw 40% expansion in the money supply in months and tacked $5 trillion onto the Fed's balance sheet and the time it takes to get a domino's pizza delivered is the hawkish choice. There's also a lot of notice about the fundamental shift in tone in the Fed. Joe Wisenthal writes, Biden extolling the benefits of an economy where companies compete for workers rather than workers competing for jobs. Edward Harrison at Bloomberg builds on this, saying Joe Biden just implicitly rejected the Phillips curve view of central banking and presenting Jay Powell for renomination. He said Powell supports an economy where firms compete for workers instead of the reverse. Powell just started his remarks on renomination talking about people who were left behind, just getting onto the wage gain ladder before the pandemic snuffed out the recovery. And then he talked about maximum employment. That speaks volumes.

Now, Powell will likely have an easy time passing through. John Tester, one of the most challenging Democrats for Democrats, writes, Smart Move by POTUS to re-nominate Jerome Powell to lead the Fed. Chairman Powell has been a nonpartisan steward of the economy through a major economic crisis. Our recovery is ongoing, and continuity at the Fed is critical, as we keep working to lower costs for Americans. Now, Brainer, on the other hand, is replacing Richard Clareda in the vice chair slot, and people are anticipating some amount of opposition from Senate Republicans based on her hard banking

regulation positions. At the same time, some have noted that she was noticeably not named Vice Chair of Supervision and Regulation, which is the top bank regulator position. Danielle D. Martino Booth says Brainerd would not have been confirmable. The real plot twist was that she was not named to Vice Chair of Supervision and Regulation. That crucial position remains open. Elizabeth Warren, of course, remains unhappy, saying, it's no secret I oppose Jerome Powell's nomination, and I will vote against him. I will support the president's nomination of Lail Brannard as vice chair. Powell's failures on regulation, climate, and ethics make the still vacant position of vice chair of supervision critically important. The position must be filled by a strong regulator with a proven

track record of tough and efficient enforcement, and it needs to be done quickly. American taxpayers have bailed out financial institutions enough times. It's the job of the Federal Reserve to ensure large financial institutions do not put our economy at risk. As we move forward, I will use every oversight tool within reach to make sure that the Federal Reserve works for American families and not Wall Street. Now, overall, it is likely to be a tough time for the Fed. Claudia Somm, a Bloomberg opinion columnist, said the Fed is facing its most difficult period in its history since the Volker era. The Fed is, of course, seeing pressure from both sides, mounting pressure to do something about inflation, but also pressure from the markets to keep the money

easy and not do things that could tip us into recession post-COVID. This is a delicate dance, right? Kartik Krishnayer says on Twitter, if Powell keeps interest rates low, inflation will continue to rise, and we will have no option to do what Paul Volker did, which is to effectively plunge us into a depression to defeat inflation. The clock is ticking. Hopefully Powell wises up after renomination.

What about other political issues faced by the Fed? Well, as I mentioned, there's the reputational issues. We've had scandal after insider training scandal, issues that have forced the Reserve Bank presidents in Dallas and Boston to leave their posts, and which have led to a ban on buying individual stocks and bonds. There's the issue, of course, of the everything bubble. The Fed staff says there are notable vulnerabilities based on how risk assets are behaving.

There's the climate change issue and how much it should be considered a risk to financial stability. On the one hand, Republicans say this is mission creep, but on the other hand, progressives say the central bank isn't doing enough. Same with income inequality. As we've discussed, maximum employment is one of the Fed's mandates, but this has expanded over the past years to make sure they're also trying to get broad-based and inclusive jobs. Progressives, however, are pointing to increased inequality because of quantitative easing and because of the way that that inflates asset prices.

And then, of course, the Fed has identified crypto risks, particularly around stablecoins and pressure to create a digital dollar. That pressure is coming from China competition as well as from the rise of domestic USD-denominated stable coins. Now, to wrap up this Fed-related show, let's actually talk about their complicated relationship with crypto. A lot of the tweets you're going to see are just engagement takes. Not that they're wrong. VJ. Boyapati tweets Biden just renominated Powell. You know what that means.

Thanks for helping along Bitcoin's monetization, Mr. President. But still, great tweet aside, it's a lot more complicated than that. Bitcoin and crypto interact with Federal Reserve policy in the context of being risk assets. Cryptos is something very far out on the risk spectrum. Benefit from the search for yield. Benefit from the cheap money era that we've been in. In turn, they would be harmed by rising rates. At the same time, Bitcoin in particular, but also some other cryptos, are increasingly perceived as safe haven assets, where their fixed supplies or predictable inflation schedules stand in contrast to central bank fiat money. And as many people as there are that dismiss that take, the people who believe it, which is a growing number, set a price floor that increases over time.

Fed policy could have very different and potentially countervailing impacts, given that some are seeing Bitcoin and crypto as a safe haven, and that for some, it remains just a risk asset alongside any other risky bet. And then, of course, as I mentioned, there's the dollar competition take with stable coins being an increasing focus, something that's being discussed at many different levels of government and seems to be a central crypto policy issue for the years to come. So what do I think happens now? Personally, I think the Fed is going to try to thread this line. rates will be low enough that it will have only a moderate effect on risk assets, and there will be enough intervention that the Haven argument will still be high conviction for many people.

I don't know whether there's really the political will to actually push markets into a recession to get a handle on inflation. So you have to think the Fed is really hoping that their transitory idea, although they're not saying it anymore, is correct, and that is supply chains even out, inflation will start to peel back. Now, I believe dollar competition is going to be a really interesting feature of this next Fed chairmanship for Jerome Powell. Stablecoins will be a primary battleground, but I don't think it's just going to be, or even mostly going to be, in the context of the Fed. This is a battle that will happen in Congress. Step one will be to figure out who actually is allowed to issue them and what regulations they need to abide by. It feels highly likely that whoever is allowed to issue them, there will be massive increased reporting requirements and reserve transfer.

But I still think that there is a possibility, especially if China launches its DSEP, and especially if China's DeSep starts to get more traction, that there will be some voices in government who suggest, or who at least suggest we look at, whether it's possible to take the U.S.D. denominated stable coins that already exist and formalize them in some way into a new type of digital dollar regime. Remember, if we're looking at who is ahead, when it comes to digitized fiat currencies. Only through the lens of which central bank is farthest in their plans, there's no question. It's China. China is much, much farther along than any other major economic player. If, on the other hand, we look at real usage of fiat-denominated stable

coins, then it is again no competition but in a different direction. U.S. denominated stable coins are already a major feature of the economic landscape. And the U.S. frankly, has a history of absorbing private sector innovation into the formal economic system. Will we see something like that again? I wouldn't be surprised. For now, guys, I hope this episode helped you understand what we might get out of a new Powell chairmanship and what it means. But until tomorrow, be safe and take care of each other.

Peace.