How central banks, including the Fed, have failed at their inflation mandate

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In a surprising turn of events, Julian Assange has walked free after pleading guilty to leaking US national security secrets. His release comes as Evan Gershkovich, a Wall Street Journal reporter, heads to trial in Russia on espionage charges, highlighting ongoing international tensions surrounding press freedom and national security.

In today’s email:

• Fed Watch: How central banks, including the Fed, have failed at their inflation mandate

• Bitcoin: Bitcoin remains above $60,000 for now despite slump.

• Solana: Innovating to make crypto trading easier on social apps.

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THE BIG IDEA

Independence Without Accountability: The Fed’s Great Inflation Fail

Central banks, particularly the Federal Reserve, has been facing a myriad of issues in managing inflation post-pandemic. It's been a wild ride, and not in a good way. Central banks, including the Fed, Bank of England, and European Central Bank, have been under scrutiny for their failure to predict and effectively combat the surge in inflation that eroded the purchasing power of households across the US and Europe.

Key points

1. Central Banks' Missteps: Central banks didn't see the inflation coming, initially labeling it as "transitory." They struggled to manage it using interest rate hikes, risking economic downturns.

2. The Role of Central Banks: While central banks have been credited with maintaining low inflation for decades, other factors like globalization and technological advancements played significant roles. The recent inflation episode calls into question the extent of central banks' influence on price stability.

3. Challenges in Managing Inflation: Central banks' tools, particularly interest rates, have limitations in addressing supply-side inflation caused by factors like pandemic-induced supply chain disruptions and geopolitical tensions.

4. Calls for Reform: Independent reviews of central banks' forecasting processes, increased accountability for policymakers, and a more collaborative approach to economic policy involving both central banks and governments are needed.

5. The Need for New Strategies: Governments should play a more active role in fighting inflation, especially when it stems from supply-side issues and implement measures like investing in supply chain resilience, releasing strategic oil reserves, and combating price-gouging monopolies.

6. The current frameworks for managing inflation, heavily reliant on independent central banks and interest rate adjustments, is insufficient. A re-evaluation of this approach and the development of new strategies involving a broader range of economic actors are necessary.

MARKETS AT A GLANCE

TOP NEWS

Julian Assange Walks Free Amidst Crypto Ties

Julian Assange, co-founder of Wikileaks, is now free after a plea deal with the U.S. Department of Justice. After years in a U.K. jail and asylum in Ecuador’s embassy, Assange left the U.K. for Saipan, where he faces a five-year sentence credited with time served. Wikileaks' history with crypto is notable; they adopted bitcoin for donations during financial blockades, boosting both the platform and cryptocurrency's credibility.

Asian Stock Market Movements

Japanese, South Korean, and Taiwanese stock markets saw gains, while mainland China and Australian markets declined. US stock futures were stable after a rebound in Nvidia Corp. boosted the S&P 500.

Australian Dollar and Inflation Data

The Australian dollar and bond yields increased following higher-than-expected inflation data, suggesting persistent price pressures. This data supports the case for the Reserve Bank of Australia to resume raising interest rates.

Japanese Yen and Intervention Concerns

The yen remained near levels where markets are watching for potential intervention. It was trading just below the psychologically important level of 160 per dollar.

Chinese Economic Indicators

China’s 10-year bond yield fell to a two-decade low amid economic slowdown concerns and expectations of further stimulus. A survey by Bloomberg indicates an improving outlook for China's exports despite slowing consumer spending.

Bond Traders Bet on 300 Basis Points of Fed Cuts by March

Traders are betting on the Fed cutting interest rates by 3 percentage points by early 2025, targeting a policy rate as low as 2.25%. This aggressive position, seen in the Secured Overnight Financing Rate options market, contrasts sharply with Fed officials' forecast of just a 25 basis point cut this year and a total of 125 basis points by end-2025. Such a significant cut seems unlikely unless the US economy faces a sudden recession.

Corporate Developments

Companies like Rivian Automotive Inc. and FedEx Corp. saw significant stock movements based on corporate announcements and forecasts.

Commodities and Currencies

Oil prices showed a decline after an industry report indicated a small build in US crude inventories. Gold prices were relatively stable.

CRYPTO

Mt. Gox Redemption Fears Overblown, Say Traders

Concerns about a selloff from Mt. Gox's $10 billion BTC distribution may be exaggerated, according to traders. With the exchange set to start repayments in July, Galaxy Research suggests many creditors will hold onto their Bitcoin due to its low-cost basis, easing fears of immediate selling pressure. Analysts believe the impact on Bitcoin’s price will be minimal, as most BTC will likely stay with long-term investors.

Get-Rich-Quick Trades Reverse as Nvidia, Bitcoin Slump

Bitcoin and Nvidia have shown that market momentum can shift rapidly. Bitcoin fell significantly, nearing a crucial $60,000 support level, while Nvidia dropped nearly 7%, losing about $430 billion in three days. Despite long-term gains, these shifts highlight the fragility of risk appetite amid expectations of sustained high interest rates. While Bitcoin recovered slightly, broader market resilience is supported by gains in global stocks and gold, emphasizing the need for market breadth.

PoliFi Tokens Surge Amidst DJT Token Controversy

PoliFi tokens are rallying after denials of any Trump campaign involvement with the DJT token. Despite Martin Shkreli’s claims, no credible evidence links Trump or his family to the token. TRUMP gained 24%, TREMP added 20%, and BODEN soared over 45%. The PoliFi sector overall rose 14%. Although Polymarket disputes resolved DJT as not real, the token surged over 30% in 24 hours. Shkreli insists Barron Trump was involved despite the investigation’s findings.

Solana Adds 'Blinks' and 'Actions' for Seamless Crypto Trading

Solana is introducing "Actions" and "Blinks" to make crypto trading easier on social apps. These features, developed with Dialect, allow users to transact directly within websites and social platforms. Supported by popular wallets like Phantom, these tools aim to simplify trading and drive mainstream adoption. Solana's new tools could help meme coins, like Iggy Azalea's $MOTHER and $WIF, become more accessible, bridging blockchain tech with everyday internet use.

GOLD

Gold Prices Weaken as China Halts Purchases

Gold prices have softened after China ended its 18-month gold buying streak in May, impacting sentiment for precious metals. The FOMC’s reduced rate cut expectations for 2024 also weigh on the market.

Technically, gold saw a double-top bearish reversal and bearish divergence, falling to a recent low of 2286.86 on June 7, before stabilizing around 2322. Support levels are at 2286, 2272, and 2241, with resistance at 2340/2343 and 2367.

Despite short-term risks, we remains bullish on gold, given easing monetary policies, potential central bank purchases, and geopolitical tensions.

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