Fed testimony to Congress
This week was highlighted by the 2 day Federal Reserve semi-annual testimony to Congress. This came at the time of record high unemployment numbers, struggling small businesses and average Americans. All this manifests in public protests in most major cities, first waive of pandemic finishing its course, while China warning of the second waive emerging.
During the first day of the Fed testimony, before the Senate banking panel on Tuesday, the central bank chairman warned of “significant uncertainty” about the path of the recovery. He also explained the Fed’s corporate bond buying program and reiterated that he doesn’t see negative interest rates in the future.
Negative rates would indeed be a bad thing for the US economy. The Quantitative Easing or QE efforts by the Fed have already taken a big bite of growth and income from the market, which slowed down the inflation and halted the economic growth. Overnight interest rates pegged at near 0% are providing plenty of liquidity to the banks, but we don’t see it translating to the main street loans. Large mortgage lenders on the contrary are tightening the lending standards, some are increasing the minimum credit score and downpayment requirement to minimize their exposure to potential defaults.
I view these efforts by the Fed and the Government as efforts to soft land the US economy. Back in February – March 2020 it was obvious to Wall Street that markets have overheated and were due for a correction. Coronavirus lockdowns, stay at home orders, and a massive shift in consumer behavior only accelerated the correction into a panic sell-off. We needed a way to stimulate the markets to stop the panic and ease the economy into slower growth to allow it to take a breath. Fed’s actions, massive $2 trillion dollar stimulus accomplished that. But what it also turned out to be was a major pump in equities, accelerated by the social retail investment platforms like Robinhood. Younger Americans were attracted by the free Stimulus money, and stories of doubling or tripling it on Robinhood by buying up near bankrupt stocks and investing into high risk option contracts. All this became evident to the public on June 12th when a 20-year-old student died by suicide after confusion over an apparent negative balance of $730,000 on his Robinhood account.
It is not easy to navigate a multi-trillion dollar economy in the times of social media dominance, highly volatile stock markets, underfunded pensions looking for yields, and record-high unemployment. Soft landing economy requires a careful plan and a stellar execution, which Fed assured Congress it can deliver.
“I don’t see us wanting to run through the bond market like an elephant snuffing out price signals, things like that.”
Fed Chairman Jerome Powell
While all this unfolding on the traditional markets, the Cryptocurrency markets kept growing and expanding. Compound finance – a popular DeFi protocol approved the issuance of a Comp token to the investors and borrowers on its platform on June 15th. That created a network effect fueled by additional incentives to participate, so Compound saw its total deposits jump to over $700 million from only $100 million just a week ago. Investors saw opportunity to participate in earning high yields and Comp token rebates.
While newsworthy, all the DeFi investments should be carefully considered since they are not backed by FDIC or any other government agency. In addition, the funds stored in the smart contracts become like a honeypot for hackers at large, so if you are thinking about engaging with DeFi please use extreme caution.
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