Powell Talks Tapering
Jerome Powell spoke today at his scheduled Federal Open Market Committee September press conference. The highlight is that the Federal Reserve has met their inflation goal with plans to start tapering, perhaps as soon as the next meeting in November. Tapering will begin as long as we see “a decent employment report.” Powell mentioned that ending the tapering by mid-2022 may be appropriate. He also noted that they want to address tapering first before turning to other issues like the balance sheet.
The tapering decision coincides with the rising Consumer Price Index and consumer inflation expectations. Powell mentioned that inflation is elevated and will likely remain so for months. The Federal Reserve keeps pushing the “transitory inflation” narrative, saying they will respond accordingly “if inflation overshoots their expectations.” From their own surveys, everyday people are expecting more inflation in the short term and in the medium term.
How did markets react? Everything Powell said seems to be in line with the current market expectations. We saw some minor flattening of the 10-year Treasury rate with the S&P 500 up 1% on the day, but that's about it.
The Federal Reserve also released their new, so-called “dot plot” which shows officials are evenly split on whether to raise federal funds rates in 2022. The plot predicts a median federal funds rate of 1.75% by 2024. The dot plot has proven to be a terrible predictor of future rate policy, and acts as more of what committee members are thinking at the time. As said by Powell himself in a FOMC press conference earlier this year,
“The dots are not a great forecaster of future rate moves. And that's not because -- it's just because it's so highly uncertain. There is no great forecaster of future dots. So, dots [need] to be taken with a big grain of salt.”
To quote Paul Tudor Jones regarding bitcoin and the Fed,
“I like the idea of investing in something that’s reliable, consistent, honest and 100% certain. Bitcoin has appeal to me because it’s a way for me to invest in certainty.”
“With employment, the Fed wants to see outcomes, with inflation, they insist it's transitory. It's an intellectual incongruity that risks damaging their credibility if they're wrong."
Right now, there is little faith or certainty in the Federal Reserve’s next move. Bitcoin is the certainty and hedge against it.
Lightning Network Continues To Flourish
Public-channel capacity on the Bitcoin Lightning Network continues to explode, with channel capacity hitting another all-time high of 2,738 BTC today. The Lightning Network is a Layer 2 scaling solution built on top of the bitcoin base layer, which allows two peers to open up a channel between each other and defer final settlement into the future.
The Lightning Network whitepaper was first released back in January of 2016 as a proof of concept idea, as the bitcoin base layer has a limited throughput, which was and still is needed to keep the network sufficiently decentralized (the larger the block size the larger the cost to run your own node).
Although the network functions using payment channels opened between two peers, public channels and node interconnectivity allow for payment routing through other Lightning nodes on the network, who can selectively choose what fees are charged and whom on the network they are connected to.
The Lightning Network also allows for private channels between peers but this balance is not visible.
The last three months the Lightning Network has witnessed spectacular growth, most likely in part to El Salvador adopting bitcoin as legal tender, with the Lightning Network playing a major role in the onboarding process.
On average over the last three months, public channel capacity on the network has grown by 12.5 BTC per day.
Similarly to the bitcoin base layer, the best scaling solution for the Lighting Network is bitcoin’s underlying “Number Go Up” technology. As additional people, institutions and nation-states choose to adopt the Bitcoin monetary network, the fixed supply of the asset means that the underlying BTC/USD exchange rate must appreciate, which itself scales the capacity of the network.
Not only is public-channel capacity going parabolic, but the exponential appreciation of the price of bitcoin since Lightning first began to enter mass beta testing in early 2018 has meant that the dollar-denominated channel capacity of the network has exploded.
Above is public channel capacity in linear scale and below is the same chart in logarithmic scale for context:
As the security model of the Bitcoin network continues to transition programmatically to an entirely fee-based model (as new bitcoin issuance trends towards zero), it is probable that fees will rise substantially as demand for blockspace continues to increase as bitcoin adoption increases. Below is the ratio of miner revenue derived from new supply issuance versus transaction fees over time:
This trend is very important for the adoption of the Lighting Network. It is likely true that on the other side of hyperbitcoinization, most people will not transact across the bitcoin base layer, but rather across Layer 2 solutions like Lightning.