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In this episode of Bitcoin Magazine’s “Fed Watch'' podcast, Christian Keroles and I sit down with Jeff Snider, Head of Global Investment Research at Alhambra Investments and premier Eurodollar expert, for a conversation about the current and changing state of the global financial system.
We cover LIBOR and SOFR, the Federal Reserve hawkish pivot, what we can learn from yield curves, and of course, bitcoin.
Why LIBOR and SOFR are important Deep in the heart of the Eurodollar system was the London Interbank Offer Rate, known as LIBOR. It was the rate that banks charged each other to borrow money. Since it acted as a Fed Funds rate of sorts for the international Eurodollar system, it was the rate at which informed all the other rates above it.
For years, the Federal Reserve and other central banks had been trying to get rid of LIBOR and it seems they might have done it this time. In 2022, “financial firms using LIBOR face legal, operational, credit, regulatory, and reputational risk,” according to a Congressional Research Service (CRS) document published on Dec 15, 2021.
Jeff's comments were insightful around why it had taken so long to move away from LIBOR and that the transition will take until at least June 2023 when the last futures contracts using LIBOR expire.
The replacement offered by the Federal Reserve is the Secured Overnight Financing Rate (SOFR), while private firms like Bloomberg are also offering alternatives. There is no clear winner at this time, and it might be that there isn’t one for a prolonged period of time.
LIBOR was an emergent market phenomenon that allowed Eurodollars contracts to eat the financial world. From the above document, in 2020, LIBOR was referenced in $223 trillion worth of contracts. That’s a lot of unwinding, and Jeff mentioned that in stopping the market from using LIBOR, regulators opened up much more systemic risk and uncertainty.
For my part, I think this a fantastic opportunity to observe how the system adapts to a fundamental change. One day, it will have to happen when they adopt bitcoin, so this experiment is one where we can get some data.
Exploring Reasons for the Hawkish Fed Pivot I couldn’t let Jeff come on the show and not ask him what his thoughts are on the recent Jerome Powell flip-flopping. His response centered around the Fed being worried that the confusion and discontent over the world “transitory” was going to filter through to longer run consumer and business inflation expectations. That’s what the Fed has wanted since the Great Financial Crisis (GFC), but now they are worried inflation expectations will become too high.
Jeff points out that inflation and growth expectations have actually been falling as the Fed has been pivoting hawkish (not after!). The 5y 5y forward is falling below 2% and the IMF has released their January updated GDP estimates for 2022, three months after their previous estimate, cutting US growth by 1.2% to