Written by: Liu Jiaolian
Overnight this morning, the Federal Reserve's December interest rate meeting ended as scheduled. The result was in line with market expectations, with a further 25bp cut in interest rates. This result was beyond the expectations of some people who had previously speculated that interest rate cuts would be stopped. So far, since the second half of 2024, the Federal Reserve has cut interest rates three times, with a reduction of 100bp, or 1%, reducing the US federal interest rate from 5.5% to 4.5%.
This brings the interest rate back to the level at the beginning of 2023.
The interest rate cut has been implemented. However, the three major US stock indexes and the crypto market have all pulled back. Why? Because the expected interest rate cut has long been predicted by the market and overdrawn in advance. This has led to a situation where the good news has been implemented but the market has turned empty. The green mountains are still there, and the sunset is red again.
Of course, the reason for the correction is related to the statement of the Fed Chairman that policy adjustments may be more cautious next year. After all, this is different from the radical expectation of some people in the market that interest rates will continue to be cut rapidly next year.
After all, in this Kondratieff depression period when radicalism is prevalent around the world, being a little less radical will be criticized as conservatism. An incomplete interest rate cut is the same as not cutting interest rates at all.
If you stand in the middle as a moderate, you will be criticized by those on your right for being too left-wing, and by those on your left for being too right-wing.
Why does Chinese philosophy like to talk about the doctrine of the mean? This is called making up for what is lacking. Chinese ancient philosophers have long seen through that society is too easy to evolve into an "M-shaped" shape, and those who stand in the middle are the bravest. Without courage, you dare not stand in the middle. If you are not strong enough, you will be torn to pieces if you stand in the middle.
It is either black or white, either left or right, either heaven or hell, one thought can make you a Buddha, one thought can make you a ghost. Today is the blockchain revolution, tomorrow is the tulip scam.
It is easy to play tricks. It is difficult to be a man floating between heaven and earth and standing tall. It is easy to blindly cater to the public sentiment and flatter or criticize. It is difficult to look at new things objectively and without prejudice and seize historical opportunities.
If you don't understand her goodness, it's because you haven't been with her yet. If you have been with her for a long time, you will know her goodness.
At the early morning press conference, Powell's response to reporters' questions became a hot topic.
The reporter asked about the U.S. national BTC strategic reserve.
Powell replied: The Federal Reserve is not allowed to own Bitcoin. We are not seeking changes to the law.
What he said is indeed in line with the "current" situation.
It's just that this statement is rather general, general and vague. We need to break it down carefully.
First of all, what is the nature of BTC in Powell’s mind?
Looking back at the article on December 5, 2024 (Bitcoin is back, breaking $100,000 for the first time), Powell recently said publicly that in his opinion, BTC is more like gold. He said, "It is not a competitor to the US dollar, but a competitor to gold."
That is, he believes that BTC is a real asset.
So, can the Federal Reserve directly "own" physical assets? Obviously not.
For example, gold. The U.S. Treasury actually owns the gold reserves. The actual storage and custody are scattered across the United States in reserve warehouses (such as the Federal Reserve Bank of New York). According to the Gold Reserve Act of 1934, the Treasury Department issues gold certificates to record the value of the gold it owns. These gold certificates issued by the U.S. Treasury are the legal proof of the gold reserves.
Can the Federal Reserve own gold as a physical asset? No. The Federal Reserve can only own gold certificates as financial assets.
However, even if you want to own a gold certificate, you need to act according to the law. The key here is to legally include the value of financial assets in the Federal Reserve's balance sheet.
Under the Federal Reserve Act of 1913, the Federal Reserve can include gold certificates on its balance sheet as part of its reserve assets. Gold certificates are recorded on the Federal Reserve's balance sheet at a nominal value, representing the value of gold pledged by the Treasury.
In accounting, the price of gold reserves is set by the International Monetary Fund Agreement Act of 1973, which is a fixed price of $42.22 per ounce of gold, rather than the market price. Regarding this pricing, Jiaolian discussed it in detail in the article (How Much Gold Does the United States Hold?) on November 14, 2023, so I will not repeat it here.
However, this pricing is not a hard and fast rule. For example, our central bank adjusts the pricing according to the market price. For details, please refer to the article on October 31, 2023 (The "Secret" of the Central Bank).
Well, after understanding this, we need to examine two questions in turn:
First, can the new US president authorize the Treasury Department to reserve BTC (Bitcoin) and issue “Bitcoin coupons” solely by presidential power?
Second, can the Federal Reserve, without amending the Federal Reserve Act of 1913, take emergency action and include “pie bills” in its balance sheet?
As for the first question, John F. Kennedy, the 35th President of the United States, has already set an example.
On June 4, 1963, President Kennedy signed an executive order, Executive Order 11110. The executive order authorized the U.S. Treasury to issue "Silver Certificates" in the name of the Treasury based on the silver reserves owned by the Treasury in accordance with the Silver Purchase Act of 1920.
Essentially, Silver Certificates were a form of U.S. currency that could be exchanged for an equal amount of physical silver.
On November 22, 1963, President Kennedy was assassinated. For details, see the article on November 8, 2024 in the Teaching Chain (The Federal Reserve cut interest rates as expected, and Powell refused to resign).
The voice of a female singer seemed to come from the radio:
"I want to ask if you dare / to love me like you said /
I want to ask if you dare / to be crazy about love like me
I want to ask if you dare to love me like you said.
I am crazy about love / What do you think?
As for the second question, the Federal Reserve has already demonstrated it itself.
During the 2008 financial crisis, the Federal Reserve adopted a series of unconventional monetary policies, including the purchase of MBS and other financial assets, to provide liquidity and support the U.S. economy. This policy is called Quantitative Easing (QE).
Section 14(2) of the Federal Reserve Act of 1913 allows the Fed to purchase government securities (such as U.S. Treasury bonds) to manage the money supply and stabilize the economy, but the act does not explicitly authorize the Fed to purchase private assets not related to the government, such as mortgage-backed securities (MBS).
The core question is: Is the power of the Federal Reserve public power or private power?
After all, public power cannot be exercised without legal authorization. If the law does not explicitly stipulate that the Federal Reserve can purchase MBS in person, then its direct purchase of MBS is suspected of being illegal.
However, the Federal Reserve, as the central bank of the United States and even the world, is a bug-like existence. In fact, the Federal Reserve is a private institution rather than a public sector. Private rights are allowed unless prohibited by law.
Therefore, this allows for flexible interpretation of the law.
The usual explanation is this:
For one thing, the [Federal Reserve Act of 1913] does not explicitly prohibit the Fed from purchasing specific types of assets.
On the other hand, the Fed has found other laws to back up its "emergency powers", including laws such as the Emergency Banking Act of 1932 and the Financial Stability Act of 2008. These laws authorize the Fed to adopt more unconventional monetary policies in specific emergency situations, and are considered to provide a legal basis for the Fed to purchase MBS during the crisis.
In summary, the Fed explained that its MBS purchases were motivated by monetary policy and financial stability needs and were emergency measures taken in response to the extraordinary circumstances of the financial crisis. So, even though these actions did not fall within the letter of the Federal Reserve Act of 1913, the government provided a legal basis for them through the new authority.
In fact, U.S. courts at all levels have never explicitly ruled that these actions violated (the Federal Reserve Act of 1913), but rather viewed them as emergency response measures.
The conclusion, therefore, is that, despite the legal gray area, this move was not considered a direct violation of the (Federal Reserve Act of 1913).
In 2024 (5.5 Teaching Chain Insider: 1155 Bitcoins lost due to slip of the hand) and (7.1 Teaching Chain Insider: Uncontrollable rebound), Teaching Chain repeatedly mentioned that the Federal Reserve has been quietly replacing its "gray" MBS positions with legal U.S. Treasury bond positions.
This piece of shit has been wiped away from 2008 to today.
Therefore, even if it does not seek legal changes, the Federal Reserve can find a legal basis for what it does or does not do by flexibly interpreting the nature of its own powers.
Finally, I would like to mention that the global central banks also have an international coordination organization called BIS (Bank for International Settlements), which is part of the international financial order after World War II.
The members of BIS are mainly composed of central banks around the world, and there are currently about 60 members. These members include central banks of important countries in the global economy, such as the Federal Reserve in the United States, the European Central Bank in Europe, and the People's Bank of China. It was established in 1930 and is headquartered in Basel, Switzerland. It can be called a bank of central banks.
In 1974, the Bank for International Settlements (BIS) established the Basel Committee on Banking Supervision (BCBS) to develop regulatory standards and guidelines for the international banking industry.
The main function of the Basel Committee is to formulate international standards related to bank capital adequacy, risk management, and bank supervision, especially regulations on capital adequacy ratios, liquidity requirements, risk-weighted assets, etc. It usually publishes a series of regulatory standards and recommendations for reference and adoption by financial regulators around the world to ensure the health and stability of the banking system.
In 1988, the Basel Committee introduced Basel I, the first global standardization of bank capital adequacy requirements.
In 2004, the Basel Committee released Basel II, a further improvement and expansion of Basel I.
In 2010, after the global financial crisis, the Basel Committee launched Basel III, which was intended to improve the quality of banks' capital and enhance the banking system's resilience to risks during crises.
It can be seen that BIS (Bank for International Settlements) and the Basel Committee play a vital role in global banking supervision. The Basel Committee was established through BIS and is responsible for setting regulatory standards for the global banking industry, while the Basel Accords (I, II, III) are the specific embodiment of these standards.
If central banks around the world, including the Federal Reserve, want to include any assets in their balance sheets, that is, to expose certain assets to risk, they usually need to set standards through the BIS in the Basel framework, and then the member central banks can act accordingly.
The Basel Accord is called an agreement rather than a law because it relies on self-discipline and compliance by each member rather than being enforced through violent means like the law.
As luck would have it, as early as December 2022, the BIS released a report, the main point of which was that (BIS: Central banks of various countries will be allowed to allocate no more than 2% of Bitcoin from 2025) (Jiaolian 2023.12.17 article).
