Soaring Inflation Puts Central Banks on a Difficult Journey

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thedinarian@thedinarian

August 05, 2022

Soaring Inflation Puts Central Banks on a Difficult Journey

Upside risks to the inflation outlook remain large, and more aggressive tightening may be needed if these risks materialize.

Central banks in major economies expected as recently as a few months ago that they could tighten monetary policy very gradually. Inflation seemed to be driven by an unusual mix of supply shocks associated with the pandemic and later Russia’s invasion of Ukraine, and it was expected to decline rapidly once these pressures eased.

Now, with inflation climbing to multi-decade highs and price pressures broadening to housing and other services, central banks recognize the need to move more urgently to avoid an unmooring of inflation expectations and damaging their credibility. Policymakers should heed the lessons of the past and be resolute to avoid potentially more painful and disruptive adjustments later.

The Federal Reserve, Bank of Canada, and Bank of England have already raised interest rates markedly and have signaled they expect to continue with more sizable hikes this year. The European Central Bank recently lifted rates for the first time in more than a decade.

Higher real rates to help push down inflation

Central bank actions and communications about the likely path of policy have led to a significant rise in real (that is, inflation-adjusted) interest rates on government debt since the start of the year.

While short-term real rates are still negative, the real rate forward curve in the United States—that is, the path of one-year-ahead real interest rates one to 10 years out implied by market prices—has risen across the curve to a range between 0.5 and 1 percent.

This path is roughly consistent with a “neutral” real policy stance that allows output to expand around its potential rate. The Fed’s Summary of Economic Projections in mid-June suggested a real neutral rate of around 0.5 percent, and policymakers saw a 1.7 percent output expansion both this year and next, which is very close to estimates of potential.

The real rate forward curve in the euro area, proxied by German bunds, has also shifted up, though remains deeply negative. That’s consistent with real rates converging only gradually to neutral.

The higher real interest rates on government bonds have spurred an even larger rise in borrowing costs for consumers and businesses, and contributed to sharp declines in equity prices globally. The modal view of both central banks and markets seems to be that this tightening of financial conditions will be enough to push inflation down to target levels relatively quickly.

To illustrate, market-based measures of inflation expectations point to a return of inflation to around 2 percent within the next two or three years for both the United States and Germany. Central bank forecasts, such as the Fed’s latest quarterly projections, point to a similar moderation in the rate of price increases, as do surveys of economists and investors.

This seems to be a reasonable baseline for several reasons:

The monetary and fiscal tightening in train should cool demand both for energy and non-energy goods, especially in interest-sensitive categories like consumer durables. This should cause goods prices to rise at a slower pace or even fall, and may also push energy prices lower in the absence of additional disruptions in commodity markets.

Supply-side pressures should ease as the pandemic relaxes its grip and lockdowns and production disruptions become less frequent.
Slower economic growth should eventually push down service-sector inflation and restrain wage growth.
Substantial risk inflation runs high

However, the magnitude of the inflation surge has been a surprise to central banks and markets, and there remains substantial uncertainty about the outlook for inflation. It is possible that inflation comes down more quickly than central banks envision, especially if supply chain disruptions ease and global policy tightening results in fast declines in energy and goods prices.

Even so, inflation risks appear strongly tilted to the upside. There is a substantial risk that high inflation becomes entrenched, and inflation expectations de-anchor.

Inflation rates in services—for everything from housing rents to personal services—appear to be picking up from already elevated levels, and they are unlikely to come down quickly. These pressures may be reinforced by rapid nominal wage growth. In countries with strong labor markets, nominal wages could start rising rapidly, faster than what firms reasonably could absorb, with the associated increase in unit labor costs passed into prices.

Such “second round effects” would translate into more persistent inflation and rising inflation expectations. Finally, a further intensification of geopolitical tensions that ignites a renewed surge in energy prices or compounds existing disruptions could also generate a longer period of high inflation.

While the market-based evidence on “average” inflation expectations discussed above may seem reassuring, markets appear to put significant odds on the possibility that inflation may run well above central bank targets over the next few years. Specifically, markets signal a high probability of inflation rates of over 3 percent persisting in coming years in the United States, euro area and the United Kingdom.

Consumers and businesses have also become increasingly concerned about upside inflation risks in recent months. For the United States and Germany, household surveys show that people expect high inflation over the next year, and put considerable odds on the possibility that it runs well above target over the next five years.

More forceful tightening may be needed

The costs of bringing down inflation may prove to be markedly higher if upside risks materialize and high inflation becomes entrenched. In that event, central banks will have to be more resolute and tighten more aggressively to cool the economy, and unemployment will likely have to rise significantly.

Amid signs of already poor liquidity, faster policy rate tightening may result in a further sharp decline in risk asset prices—affecting equities, credit, and emerging market assets. The tightening in financial conditions may well be disorderly, testing the resilience of the financial system and putting especially large strains on emerging markets. Public support for tight monetary policy, now strong with inflation running at multi-decade highs, may be undermined by mounting economic and employment costs.

Even so, restoring price stability is of paramount importance, and is a necessary condition for sustained economic growth. A key lesson of the high inflation in the 1960s and 1970s was that moving too slowly to restrain it entails a much more costly subsequent tightening to re-anchor inflation expectations and restore policy credibility. It will be important for central banks to keep this experience firmly in their sights as they navigate the difficult road ahead.

https://blogs.imf.org/2022/08/01/soaring-inflation-puts-central-banks-on-a-difficult-journey/?utm_medium=email&utm_source=govdelivery

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Musk Turns On Starlink to Save Iranians from Regime’s Internet Crackdown

Elon Musk, the world’s richest man and a visionary behind SpaceX, has flipped the switch on Starlink, delivering internet to Iranians amid a brutal regime crackdown.

This move comes on the heels of Israeli strikes targeting Iran’s nuclear facilities, as the Islamic Republic cuts off online access.

The former Department of Government Efficiency chief activated Starlink satellite internet service for Iranians on Saturday following the Islamic Republic's decision to impose nationwide internet restrictions.

As the Jerusalem Post reports, that the Islamic Republic’s Communications Ministry announced the move, stating, "In view of the special conditions of the country, temporary restrictions have been imposed on the country’s internet."

This action followed a series of Israeli attacks on Iranian targets.

Starlink, a SpaceX-developed satellite constellation, provides high-speed internet to regions with limited connectivity, such as remote areas or conflict zones.

Elizabeth MacDonald, a Fox News contributor, highlighted its impact, noting, "Elon Musk turning on Starlink for Iran in 2022 was a game changer. Starlink connects directly to SpaceX satellites, bypassing Iran’s ground infrastructure. That means even during government-imposed shutdowns or censorship, users can still get online, and reportedly more than 100,000 inside Iran are doing that."

During the 2022 "Woman, Life, Freedom" protests, Starlink enabled Iranians to communicate and share footage globally despite network blackouts," she added.

MacDonald also mentioned ongoing tests of "direct-to-cell" capabilities, which could allow smartphone connections without a dish, potentially expanding access and supporting free expression and protest coordination.

Musk confirmed the activation, noting on Saturday, "The beams are on."

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thedinarian@thedinarian

June 22, 2025

GENIUS Act lets State banks conduct some business nationwide. Regulators object

The Senate passed the GENIUS Act for stablecoins last week, but significant work remains before it becomes law. The House has a different bill, the STABLE Act, with notable differences that must be reconciled. State banking regulators have raised strong objections to a provision in the GENIUS Act that would allow state banks to operate nationwide without authorization from host states or a federal regulator.

The controversial clause permits a state bank with a regulated stablecoin subsidiary to provide money transmitter and custodial services in any other state. While host states can impose consumer protection laws, they cannot require the usual authorization and oversight typically needed for out-of-state banking operations.

The Conference of State Bank Supervisors welcomed some changes in the GENIUS Act but remains adamantly opposed to this particular provision. In a statement, CSBS said:

“Critical changes must be made during House consideration of the legislation to prevent unintended consequences and further mitigate financial stability risks. CSBS remains concerned with the dramatic and unsupported expansion of the authority of uninsured banks to conduct money transmission or custody activities nationwide without the approval or oversight of host state supervisors (Sec. 16(d)).”

The National Conference of State Legislatures expressed similar concerns in early June, stating:

“We urge you to oppose Section 16(d) and support state authority to regulate financial services in a manner that reflects local conditions, priorities and risk tolerances. Preserving the dual banking system and respecting state autonomy is essential to the safety, soundness and diversity of our nation’s financial sector.”

Evolution of nationwide authorization

Section 16 addresses several issues beyond stablecoins, including preventing a recurrence of the SEC’s SAB 121, which forced crypto assets held in custody onto balance sheets. However, the nationwide authorization subsection was added after the legislation cleared the Senate Banking Committee, with two significant modifications since then.

Originally, the provision applied only to special bank charters like Wyoming’s Special Purpose Depository Institutions or Connecticut’s Innovation Banks. Examples include crypto-focused Custodia Bank and crypto exchange Kraken in Wyoming, plus traditional finance player Fnality US in Connecticut. Recently the scope was expanded to cover most state chartered banks with stablecoin subsidiaries, possibly due to concerns about competitive advantages.

Simultaneously, the clause was substantially tightened. The initial version allowed state chartered banks to provide money transmission and custody services nationwide for any type of asset, which would include cryptocurrencies. Now these activities can only be conducted by the stablecoin subsidiary, and while Section 16(d) doesn’t explicitly limit services to stablecoins, the GENIUS Act currently restricts issuers to stablecoin related activities.

However, the House STABLE Act takes a more permissive approach, allowing regulators to decide which non-stablecoin activities are permitted. If the House version prevails in reconciliation, it could result in a significant expansion of allowed nationwide banking activities beyond stablecoins.

Is it that bad?

As originally drafted, the clause seemed overly permissive.

The amended clause makes sense for stablecoin issuers. They want to have a single regulator and be able to provide the stablecoin services throughout the United States. But it also leans into the perception outside of crypto that this is just another form of regulatory arbitrage.

The controversy over Section 16(d) reflects concerns about creating a regulatory gap that allows banks to operate interstate without the oversight typically required from either federal or state authorities. As the two Congressional chambers work toward reconciliation, lawmakers must decide whether stablecoin legislation should include provisions that effectively reduce traditional banking oversight requirements.

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thedinarian@thedinarian

June 21, 2025

Dubai regulator VARA classifies RWA issuance as licensed activity

Virtual Asset Regulatory Authority (VARA) leads global regulatory framework - makes RWA issuance licensed activity in Dubai.

Real-world assets (RWAs) issuance is now licensed activity in Dubai.

~ Actual law.
~ Not a legal gray zone.
~ Not a whitepaper fantasy.

RWA issuance and listing on secondary markets is defined under binding crypto regulation.

It’s execution by Dubai.

Irina Heaver explained:

“RWA issuance is no longer theoretical. It’s now a regulatory reality.”

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- RWAs are classified as Asset-Referenced Virtual Assets (ARVAs)

- Secondary market trading is permitted under VARA license

- Issuers need capital, audits, and legal disclosures

- Regulated broker-dealers and exchanges can now onboard and trade them

This closes the gap that killed STOs in 2018.

No more tokenization without venues.
No more assets without liquidity.

UAE is doing what Switzerland, Singapore, and Europe still haven’t:

Creating enforceable frameworks for RWA tokenization that actually work.

Matthew White, CEO of VARA, said it perfectly:

“Tokenization will redefine global finance in 2025.”

He’s not exaggerating.

$500B+ market predicted next year.

And the UAE just gave it legal rails.

~Real estate.
~Private credit.
~Shariah-compliant products.

Everything is in play.

This is how you turn hype into infrastructure.

What Dubai is doing now is 3 years ahead of everyone else.

Founders, investors, ecosystem builders:

You want to build real-world assets onchain.

Don’t waste another year waiting for clarity.

Come to Dubai.

It’s already here.

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