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Welcome to the Forward Guidance newsletter, brought to you by Felix Jauvin and Casey Wagner. Here’s what you’ll find in today’s Thanksgiving edition:

• Interest rates are not the only figure central bankers might lower. 

• Coinbase just notched one court win. Here’s what else is on its docket.

Is the Fed worried about liquidity?

Something very interesting showed up in the FOMC November meeting minutes this week that had nothing to do with rate cut expectations. 

Hidden deep in the minutes was the following excerpt: 

Essentially, the Fed is considering lowering the award rate on Reverse Repo Facility assets by 5-basis points, which would lower the bottom of the target range of the federal funds rate band. 

Here is what that complex looks like visually: 

One can only speculate as to why the FOMC wants to lower this rate, but there’s a convincing theory:

Given the recent uptake in the Standing Repo Facility that occurred at the end of the previous quarter, paired with FOMC members acknowledging that the clock is ticking on how much longer QT can continue without potential strain showing up in the monetary plumbing system, the FOMC might be trying to get ahead of this by encouraging outflows from the RRP and increasing bank reserves to provide ample liquidity. 

As shown in this chart comparing the $1 million T-bill with the RRP award rate, money market funds are generally alternating between owning the two, depending on which has the higher yield at the time. By decreasing the award rate, T-bills are made more attractive:

As we can see in the current balance of the RRP, there’s still $186 billion of cash that is “stuck” in the RRP. By lowering the award rate, it appears the FOMC is trying to get this money into the broad financial system to ensure liquidity remains ample. This comes in the face of ongoing QT that is getting closer to a potential target that could strain bank reserve levels: 

We will need to wait until the next FOMC meeting in December to confirm if this will indeed be the case. The fact is, though, that by even acknowledging this potential dynamic, the FOMC is signaling that they are becoming increasingly concerned about bank reserve liquidity levels.

— Felix Jauvin

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Coinbase — which financed the successful legal effort of six Tornado Cash users who sued the Treasury Department over its sanctions designation — may have one win under its belt. But there are a few more court battles ahead. 

The exchange is in the midst of an enforcement case with the SEC, in which the securities regulator alleges Coinbase unlawfully operates as an exchange, broker and clearing agency. 

Coinbase has two additional cases pending with the SEC, both of which the exchange initiated. 

Its petition for rulemaking case, which was started after the SEC denied Coinbase’s request in 2022, has now advanced to the Third Circuit Court of Appeals. And its Freedom of Information Act suit against the SEC and FDIC is still ongoing. 

“We have a lot going on,” Paul Grewal, Coinbase’s chief legal officer, said in an interview Wednesday.

This week’s ruling against OFAC (which we covered in yesterday’s newsletter) has broad impacts, not just on Coinbase’s pending cases but on the crypto industry as a whole, Grewal added. 

“The implication of this decision on those cases is actually pretty significant, because, number one, it affirmed that…agencies like OFAC, agencies like the SEC, don't get to say what the law is. That's what courts are there to do,” he said. “I think it also speaks to the fact that the crypto community is having an outsized impact.” 

We’ll be following along as these lawsuits continue to develop. In the meantime, we’re thankful today for not having Coinbase’s legal bills.

— Casey Wagner