On the Margin Newsletter: If you’re watching the Fed, look at unemployment

The balance of risks has turned to the unemployment rate, which has been steadily increasing since bottoming last year at 3.4%


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Welcome to the On the Margin Newsletter, brought to you by Ben Strack, Casey Wagner and Felix Jauvin. Here’s what we unpack in today’s edition: 

  • Why inflation is the wrong figure to watch when trying to predict Fed policy. 
  • An update on the bitcoin miners wading deeper into AI.
  • BTC has rebounded a bit. Meanwhile, its correlation to equities continues to slide.

Unemployment is the issue, not inflation

To understand the Fed’s policy path moving forward, you need to be looking at the unemployment side of the mandate, not inflation. 

By all accounts, inflation is largely set to hover around the current 3% zone for the foreseeable future, barring a recession. The biggest reason for it not hitting the 2% target right now is lagging Owners Equivalent Rent inflation, something the Fed cannot easily target with monetary policy due to how long the lag is. 

With inflation pretty close to the Fed’s arbitrary 2% target, the balance of risks has turned to the unemployment rate, which has been steadily increasing since bottoming last year at 3.4%. 

Based on the latest Summary of Economic Projections, the Fed is expecting the unemployment rate to remain flat at the current 4% into year-end, and then slowly rise to 4.2% in 2025. 

Simply put, the Fed doesn’t expect any further increase in the unemployment rate this year. That sets up a very interesting opportunity for a downside surprise that could push the Fed into cutting rates in the next couple of meetings.

A great way of understanding this framework is looking at the Sahm rule:

Sahm Recession Indicator signals the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to the minimum of the three-month averages from the previous 12 months.”

The Sahm rule was established by Claudia Sahm, a previous Fed economist, and is an effective real-time indicator of recession risk.

Currently, the Sahm rule is at 37 bps. When it hits 50 bps, the Sahm rule will be triggered, which is a real-time indicator of recession risk as seen in the unemployment rate:

To understand the Fed’s calculus for easing, this is where we should be focusing as investors. Not inflation. The bar for easing based on inflation is still too high. But the bar for easing based on employment is very low as it stands.

If/when this rule gets triggered, I believe we will see some major shifts in policy from the Fed.  

Felix Jauvin


The percentage of surveyed bank professionals who say their companies have digitally transformed their data systems and processes and are “fine-tuning for more innovation.”

That’s obviously a pretty small number. The biggest bucket of banks — 41% — say they are only in the early stages of doing so (aka working to catch up), according to a report by Gresham Technologies.

Meanwhile, “neo-banks and the crypto world are setting new standards for innovation” via next-gen products and efficient back-end processes, Gresham solutions engineer director Julian Trostinsky said. 

Still, JPMorgan, Citibank and others have been among the TradFi giants exploring more ways to use blockchain tech in recent years. Most banks are hopping on the AI train, with nearly a quarter of survey respondents identifying “incorporating AI or automation” as the most important system change.

Don’t look at stocks if you’re trying to trade BTC 

Bitcoin’s correlation with stocks is on the decline again.

The 90-day correlation coefficient between BTC and the S&P 500 dipped to 0.07 Monday, down from 0.7 a month ago. A correlation of 1 means the two assets are moving in lockstep, while a coefficient of -1 would indicate the opposite. 

Bitcoin remains more closely tied to the tech-heavy Nasdaq, although this correlation has also dropped off in recent weeks. The 90-day correlation coefficient between BTC and the Nasdaq hovered around 0.4 Monday, down from 0.9 earlier this month. 

The decline comes even as crypto assets appear to be more impacted by macroeconomic conditions — like inflation readings and central bank interest rate decisions. Still, as Crypto is Macro Now newsletter author Noelle Acheson pointed out, emotions play a big role in bitcoin prices. 

BTC’s recent decline, which has seen the largest cryptocurrency lose about 11% this month, makes traders nervous and frustrated. 

“This is often a set-up for reactive panic sells, which usually lead to a sharp round of liquidations of margined positions,” Acheson said. “These moves trigger forced sells, which means more downward moves and more forced sells until vulnerable positions are closed.”

Since stocks seem to be providing little insight into bitcoin’s future moves, investors may want to keep an eye on bitcoin’s funding rate, which is typically positive but has dipped negative in recent weeks.

When the funding rate went negative in May, BTC eclipsed $70,000 just days later, so there may be hope a rebound is coming after all. 

Casey Wagner

BTC miner AI moves proliferate

A number of bitcoin miners clearly see the opportunity to dedicate a larger part of their businesses to the HPC/AI vertical, as we have seen such shifts proliferate.

Stock prices indicate the market approves.

Reminder: HPC = high-performance computing, and hopefully you know the artificial intelligence shorthand by now.

Hut 8 secured $150 million in funding (through a convertible note) from tech-focused investment firm Coatue Management, it revealed Monday. The investor deems the miner “well-positioned to accelerate new compute capacity” and advance AI.   

Indeed, Hut 8 CEO Asher Genoot told Blockworks he sees “hundreds of megawatts of opportunity” to build upon its existing footprint in the sector. 

Hut 8 stock had soared more than 17% on the day, as of 2 pm ET. 

Core Scientific’s stock price has also jumped in recent weeks on the back of its 12-year hosting contract with CoreWeave. It noted it was set to host the cloud provider’s NVIDIA GPUs for HPC operations.

The Texas-based miner built upon that deal Tuesday, noting in a news release it would deliver an additional 70 MW to CoreWeave. CORZ stock was up nearly 7% on Tuesday, by 2 pm.

“The market is big enough,” Genoot said when asked about Core also wading deeper into the sector. “I don’t think it’s direct competition.” 

Despite new opportunities after the Bitcoin halving, neither company is looking to ditch bitcoin mining anytime soon, or ever. 

Hut 8 intends to grow the businesses “in parallel” — though it might take a contrarian approach on the BTC side, its CEO noted.

“We won’t necessarily grow when everyone else is growing,” Genoot added. “And we might grow when people aren’t growing, because that’s when we believe growth is cheapest and has the best return.”

Ben Strack

Bulletin Board

  • US spot bitcoin ETFs collectively bled $175 million on Monday, marking a record-tying seventh straight trading day of net outflows for the category. The negative flows for the 10 BTC funds tracked by Farside Investors have amounted to roughly $1.1 billion over the span.  
  • BTC’s price, which briefly fell below $60,000 on Monday, was above $61,400 at 2 pm ET Tuesday — down more than 7% from a week ago. In case you missed what industry watchers are expecting next on that front, check out yesterday’s On the Margin newsletter
  • Ethereum is in the midst of its longest inflationary period, as ETH’s circulating supply has now risen steadily for almost 72 straight days. Check out the analysis by Blockworks’ David Canellis here.

Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the On the Margin newsletter.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.


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