Radically Different Defi With Radix?

Welcome back everybody. It’s been another exciting week in crypto and we’re pleased to bring you the next edition of The Blockchain Review. The recent rally in crypto has far outperformed equities, but now macro is back in the spotlight ahead of the first FED interest rate decision of 2023, on Feb 1st next week. 

Throughout 2022 crypto markets showed a large correlation with equities markets in the US, so it’s becoming increasingly relevant to have at least a basic understanding of the way traditional finance monitors and controls things. If you can get into a routine of understanding the schedules of data release dates and meetings then you’re already ahead of most people who don’t understand these, let alone the complex economic interdependencies.

There’ll be 8 FED (US central bank) meetings in 2023, the first of which is Tuesday and Wednesday next week, culminating in a decision and announcement on whether they’ll raise, decrease or keep the same interest rate. It will also indicate the amount of quantitative easing/money printing or quantitative tightening/balance sheet reduction that will take place.

The economic data for Q4 of 2022 in the US came in and is showing that GDP, Gross Domestic Product, a crude indicator of an economies growth, grew ~3% for the second quarter in a row. This is holding off recession fears and shows some resilience following the Q1 and Q2 2022 negative growth.

When the interest rate rise decision happens next week the FED will be reacting to the data released since they last met about 6 weeks ago in December. The FED are still laser eyed on bringing inflation down and they will often quote that their main function is controlling inflation.

They do have another unspecified function though and that’s to attempt to calm markets and keep them from overreacting to the decision or becoming too volatile in either direction. After every interest rate decision there is a press conference with the FED chairman, Jerome Powell, who will present a written statement and then answer a few questions. His responses inevitably do still get a reaction from the market and that’s why there’s some increased volatility on the final day of the meeting and press conference.

Currently the markets are gradually pricing in a lower terminal rate than the FED was communicating at the December meeting. This means the expectation of the market is that the FED won’t need to raise as much as originally planned in order to bring inflation down to their target level of 2%. This is based on the data of the past few weeks showing inflation continuing to fall combined with the growth in GDP.

Of course this is a constantly evolving situation. It’s what makes economics such a challenge to predict and why analysts are often off the mark. For example economic data is always backward looking, so by the time it’s released then other forces may already have changed. Black Swan events can and will happen too, such as Covid in 2020 and the Ukraine war in 2022, which really threw predictions out of the window.

Having some understanding of TradFi and central banks such as the FED will only enhance your knowledge of how and why crypto markets react as they do. Even with Bitcoin, DeFi and non-government stablecoins then many of the same economic principles regarding issuance, inflation and available interest rates apply.

We’ll always provide you with our research to help with your education. We’ll keep close track of the main developments and evolution of the niches in blockchain so that you get the best of the new knowledge. When you’ve finished reading your report then please remember to fill out the feedback form, your research is valued and we’re always open to suggestions.