A terrific Thursday to you as the Fed gave its clearest signal yet that its willing to tolerate a recession.

In brief (TL:DR)

• U.S. stocks continued to fall on Wednesday with the Dow Jones Industrial Average (-1.70%), the S&P 500 (-1.71%) and the Nasdaq Composite (-1.79%) all down.

• Asian stocks wavered as the Federal Reserve’s hawkish decision gave way to optimism that a recession will act as a circuit breaker for aggressive action.

• Benchmark U.S. 10-year Treasury yields advanced one basis point to 3.54% (yields rise when bond prices fall).

• The dollar traded near a record high amid the market jitters.

• Oil was higher with November 2022 contracts for WTI Crude Oil (Nymex) (+0.74%) at US$83.55.

• Gold fell with December 2022 contracts for Gold (Comex) (-0.02%) at US$1,675.40.

• Bitcoin (+0.81%) rose to US$19,145, trying to stabilize after the Fed’s announcement.

In today's issue...

1. U.S. Federal Reserve Reserves the Right to Spark a Recession

2. Dollar Rockets Ahead in Global Payments Race

3. House Stablecoin Bill Would Put Two-Year Ban on Algorithmic Stablecoins

Market Overview

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The Fed gave its clearest signal yet that its willing to tolerate a recession as the necessary trade-off for regaining control of inflation with officials signalling a further 1.25 percentage points of tightening before yearend. In contrast to the Fed, the Bank of Japan stuck steadfastly to its rock-bottom interest rate policy Thursday, pushing the yen lower versus the US currency. Traders are also bracing for the Bank of England to deliver its seventh back-to-back rate hike later today. Sentiment took an additional hit from Russia’s escalation of its war with Ukraine and tensions between Beijing and Taiwan. Asian markets were lower on Thursday with Tokyo's Nikkei 225 (-0.58%), Sydney’s ASX 200 (-1.56%), Hong Kong's Hang Seng Index (-1.61%) and Seoul's Kospi Index (-0.63%) all in the red.

1. U.S. Federal Reserve Reserves the Right to Spark a Recession

• U.S. Federal Reserve officials raised interest rates by another 75-basis-points for the third time in a row and forecast a further 1.25% of tightening before year end.

• They’re willing to tolerate a recession as the necessary trade-off for regaining control of inflation.

On Wednesday, U.S. Federal Reserve officials raised interest rates by another 75-basis-points for the third time in a row and forecast a further 1.25% of tightening before year end.

In their clearest signal that they’re willing to tolerate a recession as the necessary trade-off for regaining control of inflation, policymakers have demonstrated a steely resolve to tank the economy so that it’s not just some prices are lower, but that all prices are lower.

Policymakers were more hawkish than expected by cutting growth projections and raising their unemployment outlook and Chairman Jerome Powell repeatedly spoke of the painful slowdown that’s needed to curb price pressures running at the highest levels since the 1980s.

In his post-meeting press conference on Wednesday, Powell said a soft landing with only a small increase in joblessness would be “very challenging” doubling down on rhetoric about the rate hikes likely causing pain for workers and businesses.

Powell also said on Wednesday that “We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t.”

Among the 19 Fed officials, the median forecast for unemployment is to reach 4.4% next year and stay there through 2024, from the current rate of 3.7%.

Projected interest rates are reaching 4.4% this year and 4.6% in 2023, before moderating to 3.9% in 2024, which show policymakers remain apprehensive about their ability to bring down inflation.

A number of economists raised their forecasts on Wednesday for where Fed rates would peak.

Bank of America now sees hikes of 75-basis-points in November, 50-basis-points in December and two quarter-point increases in early 2023.

The Fed’s tighter policy will bring job cuts, whether it ultimately stops at its current 4.6% forecast or goes higher even as Powell acknowledged that rates may have to higher than currently expected.

2. Dollar Rockets Ahead in Global Payments Race

• Last month, the use of the euro as a global payment currency dwindled, reaching its smallest share in over two years, as the currency comes under pressure amid a strengthening dollar.

• Meanwhile, the dollar has been gaining share since May and remained in the top spot for the fifteenth consecutive month with a 42.6% share.

Think the dollar is dead? Think again.

With Europe struggling on the brink of recession amid record inflation and an energy crisis worsened by Russia’s escalating war in Ukraine, the euro has lost its appeal for use in deals, especially its near freefall against the dollar.

Last month, the use of the euro as a global payment currency dwindled, reaching its smallest share in over two years, as the currency comes under pressure amid a strengthening dollar.

If you thought cryptocurrencies were volatile, the euro has depreciated more than 12% against the dollar this year alone and looks set to keep sliding.

According to data from the Society for Worldwide Interbank Financial Telecommunications, better known as SWIFT, payments using the euro dropped to 34.5% of the market in August, a full percentage-point lower from the previous month.

Meanwhile, the dollar has been gaining share since May and remained in the top spot for the fifteenth consecutive month with a 42.6% share as investors are fleeing to the safety of the dollar and further cementing its place as currency of choice for most investors.

In cross border transactions, the dollar is always almighty, and more so today than ever before.

The gap between payments in dollar and euro has been pushed to the widest in nearly two and half years.

Nevertheless, the euro held onto its spot as the second most used legal tender in the world after the greenback, keeping ahead of currencies like the British pound and the Japanese yen.

3. House Stablecoin Bill Would Put Two-Year Ban on Algorithmic Stablecoins

• A bipartisan bill which is gaining steam in the House could lead to a two-year moratorium on issuing so-called algorithmic stablecoins like TerraUSD.

• Under the latest version of the bill, it would be illegal to issue or create new “endogenously collateralized stablecoins” otherwise known as algorithmic stablecoins.

Even as algorithmic stablecoin creator Do Kwon remains at large, his ill-conceived creation is leaving a trail of wreckage in its wage.

The collapse of algorithmic stablecoin TerraUSD has already got the attention of high-ranking U.S. policy makers, including U.S. Treasury Secretary Janet Yellen, who in May said the incident "illustrates that this is a rapidly growing product and that there are risks to financial stability."

But a bipartisan bill which is gaining steam in the House could lead to a two-year moratorium on issuing so-called algorithmic stablecoins like TerraUSD, which imploded in May and resulted in billions of dollars in losses as well as prompted policymakers to take renewed interest in stablecoins.

Under the latest version of the bill, it would be illegal to issue or create new “endogenously collateralized stablecoins” otherwise known as algorithmic stablecoins.

The bill is being crafted by Financial Services Committee Chairwoman Maxine Waters, a California Democrat, with the input of the ranking Republican on the committee, Patrick McHenry of North Carolina.

The bill, if passed, would also mandate that the U.S. Treasury Department, in conjunction with other financial regulators, draft a study on the threats and benefits of algorithmic stablecoins.

In addition, the legislation would direct the Fed to study the impact of a potential U.S. digital dollar - also known as a central bank digital currency - including the possible effects on the financial system and banking sector, as well as the privacy of Americans.

Algorithmic stablecoins work by maintaining a fixed peg against another token with a variable supply and demand.

Nation states have long struggled to maintain fixed pegs, as evidenced by the 1997 Asian Financial crisis, and artificial pegs are notoriously expensive to hold to.

That blockchain technology would solve what is essentially an intractable game theory problem is naïve at best.