BitMEX CEO Arthur Haye has underlined a political and economic divide in the Federal Reserve’s potential interest rate cut decisions. Hayes has criticized the central bank’s decision-making process, suggesting that there are long-term risks to the sudden boost.
He argues that rate cuts only offer immediate relief but do not address the need for sustainable economic growth. Markets are expecting a 25 bps rate cut next month.
25 bps rate cut expected in September
Investors are expecting a 25 bps rate cut in each of the next two Fed meetings in September and November. Reports say that the market might also be pricing in a bigger cut in December. BitMEX CEO Arthur Hayes sees a fundamental problem with how the Federal Reserve is making its monetary policy decisions.
According to Hayes’ skiing analogy, quick sugar boosts energy for the short term but nutritious “real food” provides long-lasting energy. He compared the sugar boost to interest rate cuts that provide a temporary boost to the economy. Food represents the “quantity of money,” which can provide long-lasting support to the economy.
Concerning the Fed cutting rates, Hayes noted, “The initial positive market reaction is justified because investors believe that if money is cheaper, assets priced in fiat dollars of fixed supply should rise.”
However, the executive argues that the approach will reduce the interest rate differential between other global currencies, including the USD, and the Japanese yen. Earlier in August, the Bank of Japan’s announcement of a potential rate cut led to a global equity bloodbath. The apex bank had to take a U-turn to contain the market reaction.
Fed should decide on the quantity of money
Hayes is of the view that to sustain economic growth, the central banks will have to maintain the quantity of money. That said, printing money must also keep the money supply within the expected range to control inflation. The executive explained, “The market requires “real food” in the form of printed money supplied by a rising Fed balance sheet to staunch the bleeding.”
The BitMEX CEO also touches upon the political motivations of making economic decisions. He explains that politicians in power want to stay in power by sometimes making decisions that are not the best for the economy. Hayes opines that the current Democratic government wants to boost the stock market before the 2024 US elections. To do so, Hayes claims that the administration might use financial tools and cheap money even if it is bad for the economy in the long run.
BREAKING: Inflation adjusted home prices are now a near record 100% higher than the long-term 130 year average, according to Reventure.
Even at the peak before the 2008 Financial Crisis, inflation adjusted home prices were ~10% below current levels.
Furthermore, prior to the… pic.twitter.com/hZys0UQCfo
— The Kobeissi Letter (@KobeissiLetter) August 26, 2024
The monetary policy approach is part of the larger debate within the Federal Reserve about the best way to manage economic conditions. For instance, 10 of the 12 regional Fed banks voted to keep the discount rate unchanged at 5.5% in July.
Contrarily, the Chicago and New York Fed wanted to slash the central bank borrowing rate by 0.25%. Whether the Fed will continue cutting rates after its September meeting depends on the future economic outlook, including job market growth, consumption, and inflation forecast.
