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Fed shifts the rate hikes narrative, hurting risk assets

Powell argued that the economy is hotter than expected, thus, the interest rate at the end of the current hike cycle will be higher than anticipated.
Fed shifts the rate hikes narrative, hurting risk assets

March 8, 2023 - The Fed governor Jerome Powell testified before the US congress yesterday making clear that the interest rate narrative has shifted towards a 50 bps hike on March 22. Powell argued that the latest macro data revealed that the economy is hotter than expected, thus, the interest rate at the end of the current hike cycle will be higher than anticipated. As a consequence, the probability of a 50 bps hike in the next FOMC meeting increased to 54% from 32% after Powell’s testimony, according to the CME FedWatch tool. Overall, risk assets prices dropped, including cryptocurrencies. In our view, a 50 bps hike on March 22 is the new narrative, and it would take a significant macro improvement to change the Fed’s mind for the time being.

Yesterday, the SEC felt a certain level of defeat in court with Binance US gaining approval to acquire Voyager’s assets, and the argument against Grayscale’s spot Bitcoin ETF bid being attacked. The agency had filed a limited objection to the Binance US acquisition of Voyager’s assets in early January 2023, but the judge deemed that the SEC’s objection was vague. With the approval, the acquisition moves forward in an over US$1bn deal. In Grayscale’s case, the judge pointed out that there is a conflict regarding the SEC’s decision to approve Bitcoin futures ETF and to deny Bitcoin spot ETF. Therefore, the SEC should approve both or deny both. In our view, this illustrates how the system of checks and balances works, showing that the agency is not all-powerful.

Bloomberg reported that Federal Deposit Insurance Corporation (FDIC), an independent government agency in the US, which supervises financial institutions for safety, would be in talks with Silvergate to find ways to save the bank from a possible shutdown. However, Silvergate provided a funds transferring service called Silvergate Exchange Network (SEN), which was largely used by the industry. In the absence of SEN, others could benefit, such as Signature Bank and stablecoins, filling in the void. We think this reveals that institutions may disappear due to risks inherent to their business, but good ideas will survive, following a cycle of destruction and construction in the industry.

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