Powell Defends Rate Caution

Daily Updates:

• In his second day of testimony at Capitol Hill, Federal Reserve Chair Jerome Powell, once more hammered home his justification for moving slow in adjusting the benchmark federal funds rate.

“The question is who’s going to pay for the tariffs. Originally it's the importer but it gets passed along through the distribution chain to some extent to the consumer. The ultimate question of it is how much does show up in inflation, and honestly it’s very hard to predict that in advance. So we’re watching to see what shows up in measured inflation”. 

• Powell believes the US economy is not in a period of stagflation, nor is stagflation the “base case”. However, in such a scenario it “puts the central bank in a hard place. We warned of it but it's honestly not something we’re facing or that we expect to face”. 

“One time could be the base case, but in a situation like this where the process could go on for a long time, where the effects could be large or small, it’s just something you want to approach carefully in a world where inflation is not back to 2%. That’s our job. If we make a mistake here, people will pay the cost for a long time”. 

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• As we have come to expect, President Trump also took an opportunity yesterday to reignite his criticism of Chair Powell – who has many times already felt the brunt of Trump’s anger. Speaking at the NATO Summit, Trump said “I know, within three or four people, who I’m going to pick” referring to his plans to replace Powell when his term ends in May 2026. The President added that “He goes out pretty soon fortunately, because I think he’s terrible” and referred to the Chair as a “very average person mentally”.  
• According to Trump, Powell has “a low IQ for what he does. Instead of paying $900B, we don’t want to pay 900, just because he doesn’t want to lower the rate”. 

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• The rally on Wall Street slowed down yesterday, while major cryptocurrencies continued a slow and steady move up. The S&P 500 ended the day almost flat, while the Nasdaq-100 eked out a small 0.21% gain. WTI crude prices rose by over 1% to $65, following the largest two-day drop since 2022. 

• The dollar also fell lower, with the DXY Index currently at 97.1 – despite comments from Chair Powell: “there are enormous benefits to having the dollar be the most important reserve currency in the world. It remains such and for long standing and continuing reasons … it's quite a durable equilibrium and I suspect that we will be the world’s reserve currency for a long time to come”.

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• BTC currently trades at $108K – up 10% from its local bottom of $98K last Sunday evening after the US struck Iranian nuclear sites. With the ceasefire in the Middle East looking to have at least temporarily brought some certainty to markets, BTC options are now trading once more in a low implied volatility environment. 
• At-the-money 7-day implied volatility is approaching 30% – the last time short-tenor IV fell this low was in October 2023, when BTC was trading around $30K. 
• At-the-money volatility across tenors for ETH have also been falling, led by front-end moves – resulting in a now ‘normal’ sloped term structure. However the drop in ETH IV has not occurred at a pace that has disrupted the ETH/ BTC implied-volatility ratio. 
• We mentioned in our May Volatility review that the ETH/BTC implied volatility ratio for 7-day options surged above 2 — a level it hadn’t attained in almost five years. That ratio is still intact, as ETH 7-day options trade with an IV of 61% relative to BTC’s 30%. 
• BTC volatility smiles maintain their neutral-bullish skew, while tenors less than 30 days for ETH remain skewed towards OTM puts.

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• The head of the Federal Housing Finance Agency (FHFA) which oversees Fannie Mae and Freddie Mac, government-sponsored enterprises (GSEs) that play a crucial role in the US mortgage market, has ordered the lending providers to propose ways to consider cryptocurrencies when assessing the risk for mortgage loans.
• Bill Pulte posted: “Today I ordered the Great Fannie Mae and Freddie Mac to prepare their businesses to count cryptocurrency as an asset for a mortgage”.  
• Currently, banks have not typically viewed cryptocurrency holdings as a means of creditworthiness until they were sold or converted into dollars – this order would help change that, provided the crypto assets are stored on a US-regulated centralised exchange. 
• Pulte has directed the entities to prepare proposals about the prospect with the changes then needing to be passed by their board of directors and the FHFA.
  
  
• Invesco and Galaxy Digital, a major asset manager and a crypto-focused firm, have filed to launch a spot Solana ETF, joining eight other issuers seeking approval from U.S. regulators. 
• The proposed fund would track the price of SOL, the sixth-largest cryptocurrency by market cap.

This Week’s Calendar:

Charts of the Day:

Figure 1. BTC at-the-money implied volatility across selected tenors. Source: Deribit, Block Scholes

Figure 2. ETH at-the-money implied volatility across selected tenors. Source: Deribit, Block Scholes

Figure 3. BTC 25-delta put-call skew ratio across selected tenors. Source: Deribit, Block Scholes

Figure 4. ETH 25-delta put-call skew ratio across selected tenors. Source: Deribit, Block Scholes

Figure 5. BTC at-the-money implied vol for 7-day tenor. Source: Deribit, Block Scholes