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Hi, I'm Helene Braun. I'm worried about you if you're still interested in reading about inflation or interest rate hikes. But, here is more about them anyway. Both bitcoin (BTC) and ether (ETH) fell by a record amount in a single day on Friday. This most likely has to do with the big picture of the economy.
James Bullard, president of the Federal Reserve Bank of St. Louis, said on Thursday that he is likely to vote for a 75 basis point rate hike at the next meeting of the Federal Open Market Committee in September. On the other hand, Germany's inflation report on Friday morning was shockingly high. Also, the yield on 10-year Treasury bonds is about to go over 3%, which is very important. It will be made clear why all of this is important.
I've been writing about the U.S. economy for a while now, and if there's one thing I've learned, it's that the U.S. Federal Reserve's top priority is manipulating the market. "Forward guidance" is what the central bankers call this.
In reality, this guidance is just telling the markets how the Fed is likely to change its monetary policy, so that when it does, the markets will know how to react. The chief economist at BNY Mellon recently told me that it's not a coincidence that most of the time when Fed Chair Jerome Powell is on TV, the markets go up. Even though things are uncertain, he is trying to send out good vibes.
In reality, it's all just talk, because no one, not even (or should I say especially) the Federal Reserve, knows what the future holds, as has been shown many times before (hello, "inflation is temporary").
Powell has said, "We now have a better idea of how little we know about inflation."
Here's one example: In November, inflation was 6.8%, which was the biggest increase since June 1982. Central bankers should have been worried, but the Fed's policy projections, or "dot plot," from December showed that most FOMC members thought the federal funds rate would be 0.75 percent at the end of 2022. As of August, the rate is 2.75 percent, and it is expected to go up to 4 percent by the end of the year.
No one could have predicted the Russian invasion of Ukraine, which central bankers and the Biden administration point to as a reason for rising prices, but that's the point. When an economy depends so much on the bigger, global economy, it's almost inevitable that something unexpected will happen.
Still, markets respond to any hint the Fed gives them about what it will do in the future. Right now, it looks like the stock market and crypto are headed in the wrong direction.
Even though the rate of inflation went down a little in July, it is still at 8.5%, which is much too high since the Fed wants it to stay at 2%. Still, the stock market is acting like we are coming out of a recession, not going into one.
The Nasdaq 100 has gone up 10% in the last month, and the S&P 500 has gone up 9%. This suggests that traders are getting ready for a better macro environment. This is happening at a time when inflation in the UK just hit double digits and producer prices in Germany jumped by 37.2% year over year, which was even higher than expected.
"The doves," or those who think the Fed will start slowing the economy less aggressively, "are a little ahead of themselves right now," said Victoria Greene of the venture capital firm G Squared in an interview with CNBC. People seem to be reading way too much into the consumer price index (CPI) report from last month, which showed that there was no inflation in the U.S. in July compared to the month before, even though inflation is still a big problem.
Crypto seems to agree with that. Bitcoin's value went down by 37% in June, but it went back up by 17% in July. Last month, Ether went up 57%.
"Just because inflation didn't get worse from a number that was already bad doesn't mean it's good," said Greene.
It looks like the bond market is more realistic. The yield on a 10-year Treasury bond is about to go over 3%, and the yield on a 2-year bond is at 3.2%. During normal times, long-term rates should be higher than short-term rates because investors expect to get paid more if they put their money away for longer. This reversed relationship usually means that a recession is coming, but traders don't seem to care about that.
Right now, there is a lot of uncertainty in the global markets, whether it's about a possible recession or about whether the Fed is hawkish or dovish. At the end of the day, it's all about momentum, and no one can tell what will happen next – it's all a gamble. I think we should pay more attention to the Merge, which seems to be a lot more interesting and fun these days.
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