Friday, Mar 3, 2023

Silvergate woes, regulatory noise, BTC and ETH positions unwind, and more...

“Let's think the unthinkable, let's do the undoable. Let us prepare to grapple with the ineffable itself, and see if we may not eff it after all.” – Douglas Adams ||

Hi everyone, and happy Friday! More importantly, happy 3/3… I have an irrational love of symmetric dates. Can’t wait for 3/20 (using the American date system, that will give us 3/20/2023 – a stretch, I know, but I’ll take it).

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MARKETS

A tough tradeoff

It was inevitable. In times of economic strain, the independence of central banks is almost always questioned and pressured, and the US Federal Reserve is in a particularly vulnerable situation at the moment, with the vice chair seat vacant after Lael Brainard’s jump to Biden’s economic team. Earlier this week, Senator Elizabeth Warren officially requested that Biden choose a vice chair to “counter” Chair Powell’s “excessive” rate hikes.

This highlights the inevitable trade-off between lower inflation and higher unemployment, as well as the importance of central bank independence – a premature easing of rates would keep inflation higher for longer, possibly triggering an upward spiral and hurting more people in a more lasting way. Politicians tend to think short-term, since they are almost always fighting to keep their jobs. Central bankers have the luxury of a broader time horizon, and are tasked with the balance of stable prices and employment. Whatever you may think of the Fed’s decisions, it’s a good system. Politicians should not get involved.

Continued pressure

The signs of persistent inflation are making the political pressure even more relevant, however, with terminal rate expectations continuing up, which at some stage will start to hit consumption and employment. At some stage, right? The recent resilience shown in many key indicators gives the Fed more wiggle room when it comes to higher-for-longer. Of course it doesn’t want to damage the economy and put people out of jobs, but it needs to manage inflation expectations – its hawkish words and steady hikes should achieve the latter without the former, especially since signs of a turning are starting to emerge.