Market View
Market FOMC take: The Federal Reserve hiked rates by 25bps on March 22 in a unanimous decision as we were expecting (though they did consider a pause). Markets viewed the overall message as dovish (or at least less hawkish than initially anticipated), although there was no commitment on forward guidance with Chair Jerome Powell indicating at the press conference that they’re going to take this “meeting by meeting.” The statement said that recent bank failures have resulted in “tighter credit conditions for households and businesses,” but Powell wouldn’t say how this will impact the board’s monetary policy response.
Chart 1. More funds being parked at Fed is lowering bank reserves
Our FOMC take: We actually viewed both the statement and Powell’s subsequent comments as hawkish at the margin, as the board indicated that “some additional policy firming may be appropriate” based on the outlook on the US labor market and inflation. Our interpretation is that the Fed doesn’t expect to hike aggressively in the months ahead, but they’re still worried about putting enough pressure on financial conditions to contain inflation. Moreover, Powell referred to the mismanagement at Silicon Valley Bank as an “outlier” suggesting that he does not view the risks here as systemic, which would otherwise require a stronger policy response (a pause or cut). On the other hand, Powell did confirm what we already knew– that the crisis has likely knocked off around 25-50bps from the ultimate terminal rate, leaving us closer to the dot plot’s projection of 5.25% this year.
Not done with banks: The Federal Deposit Insurance Corporation (FDIC) sold most of Signature Bank to a subsidiary of New York Community Bancorp (Flagstar Bank NA) on March 20. However, the FDIC statement said that Flagstar will not assume “approximately US$4 billion of deposits related to the former Signature Bank's digital-assets banking business” suggesting that this was Flagstar’s decision not to bid on it. Ostensibly that means FDIC still has control over Signature’s real-time digital payments platform (Signet) with no indication about what a future arrangement will look like.
Separately, US Treasury Secretary Janet Yellen spoke in front of a Senate Appropriations subcommittee on March 22, indicating that the government has not considered “blanket insurance” on all US bank deposits. We think that suggests the uncertainty surrounding the banking sector could continue in the interim, posing a short-term headwind to market stability.
Regulation: The White House released its Economic Report of the President on March 20, devoting one chapter to “Digital Assets: Relearning Economic Principles.” Many viewed the statement as widely critical of cryptocurrencies, although the report did recognize that “some crypto assets appear to be here to stay” and that it’s “possible that their underlying technology may still find productive uses in the future.” Nevertheless, in our view, the report’s concern about digital assets representing how the “risks of financial innovation” can potentially lead to “financial calamities” doesn’t seem to resonate with the current banking crisis. If anything, the current risks to the financial system seem to be the direct result of pandemic-era monetary and fiscal policies that exacerbated asset-liability mismatches at many institutions. Nevertheless, some observers are pointing the finger at crypto, despite the lack of evidence.
Meanwhile, please see the blog post from Paul Grewal, chief legal officer of Coinbase, regarding Coinbase’s receipt of a “Wells notice” from the SEC. Coinbase products and services continue to operate as usual, and Coinbase is confident in the legality of our assets and services.
ETH withdrawals: Ethereum’s core developers have set April 12 (at 10:27pm UTC) as the expected date and time for the Shanghai (Shapella) fork. Notably, the largest ETH staking pool Lido (representing 128.8k validators or 23.2% of staked ETH) has indicated publicly that its own mainnet withdrawals will only “be live around mid May” due to security audits. The delay in redemptions could potentially further limit ETH selling pressure at the margin, because it means less supply could be unlocked immediately after the upgrade is enabled. However, we had already expected that many third-party entities could use released rewards to set up new validators, so ultimately there’s little change to our outlook on the overall impact of unstaking activity. Coinbase has meanwhile published a blog explaining how withdrawals will work for our clients after the upgrade.
Markets: In the short term, crypto markets are benefiting from better liquidity as the rescues of Credit Suisse and First Republic Bank have injected some stability into the traditional finance system. Meanwhile, the Fed’s policy decision wasn’t the “pivot” that markets wanted, but we’re much closer to the end of the cycle now, which is ultimately net supportive for risk assets overall. Open interest on BTC options have increased sharply over the past ten days to 446k BTC (as of March 22, up from 327k on March 1), though the increase in ETH options open interest over the same period has been more muted (currently 4.15M ETH).
