the original 2% target “for some time” to make up for undershoots. In other words, inflation might rise in the short term, but don’t worry, we won’t raise rates.
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At first, the announcement seemed totally “meh” – the only surprise was that his remarks were not more remarkable. Given the colossal government debt, no one expected rates to be raised in the near future, no matter what inflation does.
But zooming out, Powell’s comments cement a radical shift in the role of arguably the most powerful central bank in the world. This is likely to influence more than just yield expectations: it could trigger a greater transformation of the Fed’s role.
This will, directly and indirectly, support the work going on in crypto markets. But more on that in a minute.
Origins
First, let’s look at a bit of history.
The founding Federal Reserve Act of 1913 did not specify any macroeconomic goals – the institution’s original mandate was to provide liquidity in order to avoid financial panics. The 1946 Employment Act shifted the focus to “maximum employment,” and in 1978 a new Act added a parallel goal of “reasonable price stability.” After a decades-long drift towards focusing on that at the expense of everything else, the financial crisis of 2008 jolted the Federal Reserve into again prioritizing financial stability.
That role gave it plenty of leeway as the current crisis started to unfold, and let it move into new areas that highlight its false independence. This could become increasingly significant given what Chairman Powell himself has recognized as a weakening faith in large institutions.
With the buying of corporate debt, the Fed is no longer just limiting itself to the printing of money – it is now deciding where the money goes. This is political. And with initiatives such as the Main Street Lending program, it is opening itself up to an almost inevitable wave of defaults that the taxpayer will have to fund. And that’s even before you consider the pain that a higher inflation rate will unleash on a public reeling from unemployment and foreclosures. The “average” target of 2% may not sound like much, but anyone who has been grocery shopping recently knows that the reported headline increases are meaningless to daily life in a pandemic. The Fed is effectively telling them that the whopping 10% reported annual CPI increase in July for meat, the over 8% increase in the price of eggs and the over 4% increase for vegetables (to choose just some examples) aren’t important.
We’re taught that the Fed is independent from the government, which gives it the power to focus on the economy without political interference. But its increasingly embedded relationship with the Treasury is turning the central bank into more of a political arm. Its head is a political appointee. And its powers come from Congress, which responds to voters, who could conceivably convince Congress to make some adjustments.
Let’s not forget that the U.S. Federal Reserve was created just over 100 years ago – the institution is not that old, in the grand arc of history. And its influence is not written in stone. For now, its role is significant and even essential as the global economy recalibrates debt and affiliations. But things change.
In place
Where do crypto markets come into this?
Crypto markets were born in a storm of change. In 2009, the year of the first bitcoin transaction, the role of the central bank was going through another profound transformation. The roiling markets were handing out unwelcome lessons in the hubris of assuming trends were constant and systemic institutions were immutable.
Just over 10 years later, we’re in a similar situation. What we knew to be true about finance and markets is now riddled with doubt. What we assumed just couldn’t be, now is. And the central banks that we understood to be the gatekeepers to the global economy, are struggling to define their place in a rapidly evolving chaos and rebirth.
Those of us working in this industry watch indicators of a new reality pop up almost weekly. Over the past few days, we saw a blockchain-based security token initiate an IPO with SEC approval, a long-standing and well-respected financial institution get involved in the launch of a crypto fund, and a state-owned energy giant partner to reduce flaring from operations through bitcoin mining.
These big steps forward take their place in the march towards the profound change that everyone working in crypto has been preparing for. Whatever our role, we are working on what we think comes next in the cogs of progress. Chairman Powell’s remarks this week reminded us that so are central bankers.
Progress is not just the realm of new technologies and business models, and change is not just about replacing traditional institutions with new ones. Everything evolves.
If 2020 teaches us one thing, it has to be that assumptions don’t last, and that we all need to be flexible. In a world where everything is undergoing a transformation, barriers come down faster. And, as uncomfortable as it may be, change is always an opportunity, especially when it comes from unexpected areas. In our industry, it’s what we’ve been hoping for.
Thank you for reading this article.
