Fed gets hawkish, perhaps for fear of inflation

Leo Zhang

By Leo Zhang

The Bitcoin price has tanked to a four-month low, while the dollar looks primed to rise against other fiat currencies. The US Treasury yield curve is now at its flattest since August 2007. Raising the Fed Funds Rate today -- that is, the rate at which depository banks lend to each other overnight -- Fed Chairman Jerome Powell is taking a more hawkish position, and has signalled there might be two more hikes this year (see video below). An increase in the federal fund rate pushes up the prime rate offered to consumers, decreasing the amount of new dollars created (in the form of debt).

Such aggressive rate-raising is perhaps not surprising given the environment almost ten years ago, when central banks around the world cut rates to near zero (or, in Japan, negative!), flooding the markets with liquidity in the hopes of ending the "credit crunch." This suggests that Fed economists think the growth of the US economy no longer requires stimulus, but is instead in danger of overheating and producing undesirable levels of inflation. Full employment coincides with inflation, and at 3.9% the US is there. All of this looks like good news, until it doesn't. CNBC outlook is 'solid'; if their crypto assessments are at all instructive, it might be time to start worrying.

FOMC Press Conference June 13, 2018

Why the Fed rased rates for the seventh time in three years
(NYT, by Karl Russell)

"The Fed regards an inflation rate of about 2 percent annually to be healthy. Previously, the Fed was concerned that inflation was too low, but if it continues increase quickly, that might prompt it to raise rates faster."

Commentary on the announcement

Many bitcoin adopters are believers in sound money. As inflation accelerates to six-year high, will their cause get more sympathy? Or will the uptake of excess liquidity gradually drain this nascent market? One thing for sure is, Bitcoin is venturing into uncharted territory as the macro environment shifts. The fate of the cryptocurrency market may be to lose its "uncorrelated" status.

Technical Updates

Next generation light clients: block commitments
(Jim Posen)

"Block commitments are a very powerful tool for enhancing the utility of light clients under the SPV security model. However, they come at a considerable cost since each commitment requires a consensus change. Deploying soft forks requires substantial time and effort, and if the design of the commitment is flawed or sub-optimal, the change is very difficult to revert."

EOS' experimental launch might be putting investor money at risk
(CoinDesk, by Rachel Rose O'Leary)

"The issue is that, to vote, users have to prove they hold their tokens, a process that requires the use of their private keys, sensitive cryptographic strings that prove they own their funds, and if lost, would be gone forever. As such, it seems that while users are eager to take part, they are nervous that the tools that would enable them to vote might put their holdings at risk. "

Commentary on EOS voting system

Bitcoin Q&A: Offline transactions and fault tolerance

Thread clarifying "consensus protocols" vs. "sybil control mechanisms"

Effective standards work, Part 1: the lay of the land
(Infrequently Noted, by Alex Russell)

"The status quo is powerful. Every vendor has plausible (if played-up) reasons not to implement new features. They can stall progress until they are last (or second-to last in a 4+ party ecosystem) to implement. There’s no developer wrath until that point, and it’s easy to cast FUD on not-yet-pervasive features while holding a pocket veto. Further, it’s the job of SDOs and formal Working Groups to kill ideas that are not obviously fit for purpose and which lack momentum."

The slippery math of causation
(Quanta Magazine, by Pradeep Mutalik)

"Unlike correlation, which has a specific mathematical meaning, causation is a slippery concept that has been debated by philosophers for millennia. It seems to get conflated with our intuitions or preconceived notions about what it means to cause something to happen. One common-sense definition might be to say that causation is what connects one prior process or agent — the cause — with another process or state — the effect."

News & Commentary

Banks unlikely to process payments with distributed ledgers for now, says Ripple
(Reuters, by Anna Irrera)

“'We started out with your classic blockchain, which we love,' Marcus Treacher, senior vice president of customer success at Ripple said in an interview. 'The feedback from the banks is you can’t put the whole world on a blockchain.'”

Analysis of the Canadian Securities Administrators' new guidance on ICOs

Is Bitcoin really un-Tethered?
(John M.Griffin and Amin Shams)

"One should expect this effect to be stronger for cryptocurrencies because first, there are no fundamental cash flows from which prices are derived, and second, the supply of coins is often fixed. In particular, if Tether issuances are sizable, Bitcoin prices should be affected by a movement of Tether into the market. Moreover, as discussed in H2B, if Tether is being used to protect and push up the market, the effect of Tether transactions on Bitcoin prices should be stronger following negative Bitcoin returns."