How A Secret Software Change Allowed FTX to Use Client Money

Cryptocurrency

Summary:

Bankman-Fried has apologized to customers, but said he didn't personally think he had any criminal liability.

In mid-2020, FTX's chief engineer made a secret change to the cryptocurrency exchange's software.

He tweaked the code to exempt Alameda Research, a hedge fund owned by FTX founder Sam Bankman-Fried, from a feature on the trading platform that would have automatically sold off Alameda's assets if it was losing too much borrowed money.

In a note explaining the change, the engineer, Nishad Singh, emphasized that FTX should never sell Alameda's positions. "Be extra careful not to liquidate," Singh wrote in the comment in the platform's code, which it showed he helped author. Reuters reviewed the code base, which has not been previously reported.

The exemption allowed Alameda to keep borrowing funds from FTX irrespective of the value of the collateral securing those loans. That tweak in the code got the attention of the U.S. Securities and Exchange Commission, which charged Bankman-Fried with fraud on Tuesday. The SEC said the tweak meant Alameda had a "virtually unlimited line of credit." Furthermore, the billions of dollars that FTX secretly lent to Alameda over the next two years didn't come from its own reserves, but rather were other FTX customers' deposits, the SEC said.

The SEC and a spokesperson for Bankman-Fried declined to comment for this story. Singh did not respond to several requests for comment.

The regulator, which called the exchange "a house of cards," alleged Bankman-Fried concealed that FTX diverted customer funds to Alameda in order to make undisclosed venture investments, luxury real estate purchases, and political donations. U.S. prosecutors and the Commodity Futures Trading Commission also filed separate criminal and civil charges, respectively.

The complaints – along with previously unreported FTX documents seen by Reuters and three people familiar with the crypto exchange – provide new insights into how Bankman-Fried dipped into customer funds and spent billions more than FTX was making without the knowledge of investors, its customers and most employees.

Police in the Bahamas, where FTX was based, arrested Bankman-Fried on Monday evening, capping a stunning fall from grace for the 30-year-old former billionaire. His company collapsed in November after users rushed to withdraw deposits and investors shunned his requests for more financing. FTX declared bankruptcy on Nov. 11 and Bankman-Fried resigned as chief executive.

Bankman-Fried has apologized to customers, but said he didn't personally think he had any criminal liability.

The auto-liquidation exemption written into FTX code allowed Alameda to continually increase its line of credit until it "grew to tens of billions of dollars and effectively became limitless," the SEC complaint said. It was one of two ways that Bankman-Fried diverted customer funds to Alameda.

The other was a mechanism whereby FTX customers deposited over $8 billion in traditional currency into bank accounts secretly controlled by Alameda. These deposits were reflected in an internal account on FTX that was not tied to Alameda, which concealed its liability, the complaint said.

"Safe, tested and conservative"

As Bankman-Fried grew FTX into one of the world's largest crypto exchanges, consumer protection was a central tenet of his pitch for crypto regulation in the United States. Bankman-Fried stressed this theme in countless statements to customers, investors, regulators and lawmakers. FTX's auto-liquidation software would protect everyone, he explained.

In congressional testimony on May 12, he called FTX's software "safe, tested and conservative."

"By quickly unwinding the riskiest, most undercollateralized positions, the risk engine prevents build-up of credit risk that could otherwise cascade beyond the platform, resulting in contagion," Bankman-Fried testified.

He did not tell lawmakers about the software change to exempt Alameda. Indeed, he told investors that Alameda received no preferential treatment from FTX, the SEC complaint said.

Bankman-Fried had directed subordinates to update the software in mid-2020 to enable Alameda to maintain a negative balance on its account, the SEC complaint said. No other customer account at Alameda was allowed to do so, the complaint added. This would allow Alameda to keep borrowing more FTX funds without the need to provide more collateral.

In software tweaks made in August 2020, Alameda was designated as the "Primary Market Maker" or "PMM," according to a Reuters review of its codebase. Market makers are dealers who enable trading in an asset by standing ready to buy and sell it.

To explain the change, Singh, the chief engineer, inserted a comment into the code: "Alameda would be liquidating, prevented." He included a warning "not to liquidate the PMM."

Only Singh, Bankman-Fried and a few other top FTX and Alameda executives knew about the exemption in the code, according to three former executives briefed on the matter. A digital dashboard used by staff to track FTX customer assets and liabilities was programmed so it would not take into account that Alameda had withdrawn the client funds, according to two of the people and a screenshot of the portal that Reuters has previously reported.

Bankman-Fried's house of cards "began to crumble" in May 2022, the SEC complaint said.

As the value of crypto tokens plummeted that month, several of Alameda's lenders demanded repayment. Since Alameda didn't have the funds to meet these requests, Bankman-Fried directed Alameda to tap its "line of credit" with FTX to obtain billions of dollars in financing, the complaint said.

Ultimately, when FTX customers dashed to withdraw their money this November, spooked by media reports about the company's financial health, many discovered that their funds were no longer there.

Source: ZAWYA

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Devin

Central Bank

After going into hibernation after the U.S. November payrolls and services ISM reports, the peak inflation narrative got a fresh lift yesterday when U.S. CPI rose by its lowest annual number this year, sending bond yields sharply lower and European markets to their highest levels in 6 months.

U.S. markets surged higher on the open with the S&P500 pushing up to 3-month highs, however there was some reluctance to follow through the initial gains ahead of today's Fed rate decision, with U.S. stocks eventually finishing the session well off their peaks, which in turn looks set to see markets in Europe open slightly lower.

This caution is probably well-merited given today's Fed decision where we are still expecting to see a 50bps rate rise, but where there is a risk that the exuberance of yesterday might not survive first contact with Fed chair Jay Powell's press conference.

While Powell reinforced the narrative behind a step-down in the pace of Fed rate rises in his Brookings speech earlier this month, he may well not be so keen to feed into the markets pricing in a more dovish outlook for rates as we head into 2023, especially when CPI is still very high, and when there is still a material risk that inflation could remain high deep into 2023.

That's not to say that the Fed doesn't have concerns over the effects of policy lags yesterday's inflation number does appear to suggest that after a 50bps move later today, the pricing of what comes next does appear to be shifting towards further step downs in the coming months, with the potential for 25bps increments starting in 2023.

Of course, much of that will depend on what follows data wise over the next few weeks with the December payrolls report due in January followed by subsequent inflation numbers which will fall due between now and the 1st February, when the FOMC first meets next year.

Before tonight's last Fed meeting of 2022, we'll get an insight into whether the peak inflation that we are seeing in the U.S. is starting to manifest itself in the UK inflation numbers.

Later this morning we'll get to see whether UK CPI inflation has slowed in November, after we hit 40-year highs of 11.1% back in October, with household bills rising by 11.7%, and grocery food price inflation rose to 16.5%, with big increases in the price of staples like milk, eggs, and cheese.

Recent PPI numbers have suggested that inflation is starting to plateau here in the UK, however due to errors in the calculation of these numbers, the ONS has delayed the release of these so we won't be able to glean anything in the way of clues as to what is happening in this particular area.

On the headline CPI numbers we are expecting to see price pressures slowdown from 11.1% to 10.9%, although when inflation is well above 10%, perhaps slowdown isn't the correct term. It also isn't likely to affect the calculus for the Bank of England tomorrow when they are also expected to raise rates by 50bps, although any decision is unlikely to be unanimous.

Core prices are expected to remain steady at 6.5%, while the RPI index is expected to fall back to 13.9% from 14.2%.

EUR/USD – moved through the 1.0600 area pushing up to 1.0673, opening up the potential for a move towards 1.0800. Needs to hold above the 1.0520 area for this to unfold, with further support at the 1.0340 area.

GBP/USD – managed to push through the 1.2300 level, potentially opening up the prospect of a move towards 1.2750. Still have support at the 200-day SMA at 1.2110, with interim support between 1.2260 and 1.2280.

EUR/GBP – slipped back to support just above the 200-day SMA but continues to hold above it. A break below 0.8540 opens up further losses towards 0.8480. Resistance at 0.8650.

USD/JPY – slipped back from the 138.00 area briefly slipping below the 200-day SMA at 135.00 at 134.66, keeping the bias towards the downside. We need to see a concerted break below the 200-day SMA to retarget the lows at 133.60, and lower.

Source: CMC

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Alex

Economic

Morgan Stanley raised its outlook for China's economy in 2023, predicting a rebound in activity will come earlier and be sharper than expected.

The firm raised its forecasts for the country's gross domestic product in 2023 to 5.4% from its previous outlook of 5%, according to a research note led by the firm's chief Asia economist Chetan Ahya.

"We had previously expected a rebound in activity to materialize from late 2Q23. Now we are projecting mobility to improve from early March," the note said, adding that the firm expects to see a "faster and sharper rise in mobility" to be reflected in the economy starting in the second quarter.

The outlook upgrade comes after the firm raised its recommendation rating for Chinese equities to overweight from equal-weight earlier this month on reopening optimism, marking the end of a stance that it held for nearly two years.

China's government is also shifting to prioritizing economic growth, another pillar behind Morgan Stanley's revised forecast for the country's economic outlook.

"From our perspective, policymakers are taking concerted action to lift growth across all fronts," the note said. "This is the first time since 2019 where domestic macro policies and Covid management are aligned in supporting a growth recovery, rather than acting as countervailing forces."

Reuters separately reported that the nation is working on a stimulus package worth more than $143 billion to support its semiconductor industry, which would be one of its biggest-ever fiscal incentive package.

Underpriced yuan

Morgan Stanley also sees China's foreign exchange rates as underpriced.

"In FX, we don't believe that the market is pricing in the reopening trade fully yet," the note said, adding that forex traders have historically converted their holding of the U.S. dollar into Chinese yuan while the onshore currency was stronger.

"Given the recent appreciation of CNY, they now have more incentive to convert, pushing CNY stronger, especially before the Chinese New Year when they need to pay wages and bonuses," the economists said in the note.

Morgan Stanley Upgrades Its 2023 Growth Outlook for China, Expects Stronger and Earlier Rebound_1

The onshore Chinese yuan stood at 6.9590 against the U.S. dollar on Wednesday morning – below the key 7.0 level against the greenback, which Morgan Stanley said makes it more attractive for exporters to buy more Chinese yuan with U.S. dollars.

"This is because the economic weakness will be reflected in fewer imports, supporting CNY," the note said.

'Number of risks'

One of the risks that Morgan Stanley acknowledged is a potential withdrawal of policy support.

During China's reopening process, analysts expect a surge in Covid infections. A rapid increase in hospitalizations and strain on the public health care system could possibly lead to officials in China rethinking their policy stance.

"An earlier-than-expected withdrawal of policy support – such as a sharp pullback in infrastructure spending, tightening of monetary policy, or a tightening of regulatory policies – could dampen animal spirits and weaken growth," it said.

The report said further easing of restrictions will likely lead to a significant rise in Covid cases, though the firm predicted the impact of the surge will be short-lived.

Another area of uncertainty for Morgan Stanley's growth outlook is geopolitics.

"The reappearance of geopolitical tension much earlier could also trigger a spike in China's equity risk premium," the note said.

Source: CNBC

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Thomas

Economic

Thailand's economy is projected to recover to its pre-pandemic level in 2022, but the pace of growth will be slower-than-expected in 2023 owing to global headwinds. The economy is projected to expand by 3.4 percent in 2022 and 3.6 percent in 2023. Growth in 2023 has been revised down by 0.7 percentage point compared to June projections reflecting faster-than-expected decline in global demand. Tourism sector recovery and private consumption will remain the major drivers of growth.

The Thailand Economic Monitor for December 2022: Fiscal Policy for a Resilient and Equitable Future, released today, finds that the Thai economy has shown resilience to recent global shocks. Economic growth accelerated to 4.5 percent in the third quarter of this year fueled by resurgent private consumption and strong tourism inflows following economic reopening in May and the authorities' measures to mitigate cost-of-living pressures. Tourism arrivals reached 45 percent of the pre-pandemic level in September, surpassing those in Indonesia and the Philippines.

Most recently, Thailand experienced a significant slowdown in exports growth like other ASEAN peers, reflecting the impact of the global economic slowdown. Exports of goods are expected to contract by 2.1 percent in 2023, a sharp decline from the estimated expansion of 8.1 percent in 2022. This downward revision reflects weakening demand from the major trading partners, including China, the European Union, and the US.

"As Thailand looks towards resuming its path towards high-income country status post-pandemic, raising adequate fiscal space will be necessary to meet the additional spending need and provide a fiscal buffer for future shocks," said Fabrizio Zarcone, World Bank Country Manager for Thailand.

According to the report, Thailand's fiscal response to COVID-19 significantly mitigated the impact of the crisis on household welfare. Poverty is, however, projected to rise to 6.6 percent in 2022 from 6.3 percent in 2021 as the COVID-19 relief measures start to be phased out amid elevated inflation. Additional shocks, including a renewed spike in energy prices, may further erode fiscal space unless more targeted and cost-effective social assistance measures are introduced.

"The current crisis serves as an impetus to undertake much-needed structural reforms required to improve the quality and allocation of spending as well as to raise structurally low revenue," said Kiatipong Ariyapruchya, Senior Economist for Thailand at the World Bank. "Meeting the spending need, while also improving distributional impacts of fiscal policies and undergoing fiscal consolidation, requires more efficient and targeted spending and further effort on revenue mobilization.

The report recommends improving jobs and earnings opportunities among low-income groups, while creating fiscal space to achieve adequate spending on social assistance for the most vulnerable groups including elderly, disabled and extreme poor people. Financing the necessary public investments in physical and digital infrastructure and human capital to promote growth and human development in the longer term will also be critical for achieving sustainable poverty reduction.

Source: Odisha Diary Bureau

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Samantha Luan

Stocks

Asian stocks advanced on Wednesday, bonds were firm and the dollar nursed losses after data showed U.S. consumer prices barely rose in November, stoking hopes inflation has peaked and interest rate increases will slow and eventually stop in 2023.

Nervousness about policymakers' next moves, though, kept the mood in check ahead of a Federal Reserve meeting later in the day and central bank meetings in Britain and Europe on Thursday. Investors are also turning watchful on the global economy, despite China's reopening from tight COVID restrictions.

The U.S. consumer price index increased 0.1% last month, 0.2 percentage points slower than economists expected, and in the 12 months through November, headline CPI climbed 7.1% - its slowest pace in about a year.

European markets were set for a higher open with pan-region Euro Stoxx 50 futures up 0.15%, German DAX futures flat and FTSE futures rising 0.05%. U.S. stock futures, the S&P 500 e-minis, meanwhile, advanced 0.35%.

In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan rose 1%. The index is up 1.2% so far this month.

Japan's Nikkei was up 0.78% while Australian shares advanced 0.67%.

China and Hong Kong stocks also jumped on Wednesday as easing COVID-19 curbs and refocus on economic growth underpinned sentiment.

China's blue-chip CSI 300 Index rose 0.3% while the Hang Seng Index climbed 0.89%.

"If CPI comes off and China fully reopens, that's still not really enough to go gung-ho in Asia markets, because we're facing a scenario where the more developed markets, the major markets are facing a recessionary environment in 2023," said Sat Duhra, Portfolio Manager on Janus Henderson Investors' Asia ex Japan Equity Team.

"There will be some upside from China reopening, but I think it's not enough to offset the negatives."

Overnight Wall Street surged, before paring gains to leave the S&P 500 up 0.7% at the close. The index was up nearly 2.8% at one stage, while the Nasdaq rose as much as 3.8% before closing 1% higher.

The dollar, which is falling from 20-year highs as U.S. interest rate expectations retreat, dropped broadly and sharply, while bonds rallied.

The yield on benchmark 10-year U.S. Treasuries fell 11 basis points overnight and was steady at 3.4956% in afternoon Asia trade. Two-year yields, which track short-term interest rate expectations, touched 4.2053% compared with a U.S. close of 4.229%.

The U.S. dollar fell 1.5% against the yen after the inflation data and was steady at 135.37 yen in Asia. The U.S. dollar index, which tracks the greenback against a basket of currencies of other major trading partners, fell to a six-month low of 103.57, before steadying at 104.04. It is down more than 9% from a two-decade high made in September.

Fed Ahead

Futures pricing shows markets expect the Fed will slow the pace of hikes, but still raise its Funds rate target range by 50 bps to between 4.25% and 4.5% later on Thursday.

Much of the focus then falls on the "dot plot" chart of committee members projections about future rate movements, and the tone chairman Jerome Powell strikes in his press conference.

"There are now clear signs that inflation is softening, but it is still at elevated level," said Tareck Horchani, head of dealing, Prime Brokerage, at Maybank Securities in Singapore.

"The market wants to know if the Fed will change their stance on the dot plot," he said, with the median projection in September being for a peak in the Fed funds rate of around 4.6% next year.

Oil was carried 1% higher with the broader mood, before trimming gains a bit in Asia with Brent futures last at $80.35 a barrel and U.S. crude at $75.12 a barrel.

Bitcoin got a bounce overnight, but was unable to hold onto gains above $18,000.

Cryptocurrency markets have been unmoved, but transfixed, by the arrest of FTX founder Sam Bankman-Fried, who was accused by U.S. prosecutors on Tuesday of misappropriating billions of dollars in customer funds from the cryptocurrency exchange.

Source: Reuters

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Devin

Forex

A vintage performance from skipper Lionel Messi took the World Cup semi away from Croatia and booked Argentina a place in the final.

In markets, it's now Federal Reserve Chair Jerome Powell who can take the game away from stocks that seem to be itching to rally into the end of a challenging year.

Wall Street traders did their best last night to jam the cork back in the champagne after an encouraging U.S. inflation print, pulling back larger gains to leave the S&P 500 up 0.7 per cent, in the hope of postponing celebrations until after the Fed.

The cooling of price rises sets the scene for a step down in the pace of hikes, and a 50 basis point rise - after four consecutive 75 bp increases - is baked in.

That leaves the focus on Powell's remarks and on the "dot plot" projections for where interest rates are likely to head in the next few months.

Signs of divergence in the forecasts might unnerve investors if it makes them feel the Fed is becoming harder to predict, while Powell is also likely to try striking a tone that gives plenty of flexibility to be reactive into 2023.

Still, if he sticks to his November script, which did not contain much pushback against a weeks-long bond rally and its assumption that a peak in U.S. rates is nearing, the relief could be palpable.

Things were cautious in Asia, where MSCI's broadest gauge of regional stocks outside Japan rose 1 per cent, as investors are also on the fence about chasing further gains in China's messy reopening.

The dollar loitered off its post-CPI lows, waiting for Powell.

Key developments that could influence markets on Wednesday:

UK inflation, producer prices, Euro zone industrial output, Federal Reserve rate decision

Source: Reuters

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Cohen

The latest CPI report came out this morning. It reinforced what we've been telling members for months.

In 2021 and early 2022, there was rapid growth in the price of goods and services. However, as we hit the second half of the year, the monthly growth rate plunged:

Using this chart, it is obvious that the current trend is low; the year-over-year figures are propped up by focusing on what happened six months to a year ago, instead of what is happening today.

Monetary policy (raising and lowering rates) can have a significant lag time between policy changes and their impact. Consequently, raising rates too far is a bigger risk than not raising them far enough.

Unfortunately, many members of the Federal Reserve believe (incorrectly) that failing to raise rates is the bigger risk. This is brought to you by the same team that underestimated inflation after trillions in deficits flooded the economy with cash while supply chains were constrained. Using old data is never a good idea but doing it while wielding a tool that acts slowly leads to overreactions.

CPI: Shelter

CPI: Shelter continues to prop up the numbers. We warned about this months ago as CPI: Shelter is severely lagged.

You can see the difference here:

The blue line tracks CPI based on all items. It's barely positive. The red line shows us the value for "CPI: Shelter", which was still positive at 0.6% even as rental rates are falling in several markets.

Since we know actual rental rates are DOWN and CPI: Shelter is POSITIVE, we need to strip out CPI: Shelter. By stripping out CPI: Shelter, we get the green line.

The green line shows that we're in deflationary territory. If we average the last five monthly readings for the green line, it comes to about 0%.

Excluding Seasonal Adjustments

If we remove the seasonal adjustments, the chart still looks very similar. It's not exactly the same, but the difference is too small to create any change in the thesis:

In this case, the average for the last five months is clearly below 0%.

Hello, Mr. Deflation.

Welcome to the party.

Deflation

Many of the people pleading for higher interest rates are now arguing that inflation isn't solved unless prices revert to prior levels. That would be deflation. Deflation is not the goal of our system. Arguing for deflation and higher interest rates is asking for exceptionally high "real" rates. Theoretically, if we saw 6% deflation (to reverse out the prior year of increases) with 5% interest rates, it would be 11% real rates. That has never happened in the recorded history of our country. It would be a disaster.

That scenario would involve:

1. Surging interest expense on federal and state debts.

2. Plunging nominal GDP (lower tax revenue).

3. Higher unemployment leads to more spending.

4.Fewer employed people creating goods and services (low supply).

Think about that for a moment. If we have fewer goods and services produced while running huge deficits (unemployment programs + lower income for taxes + interest expense), what happens? There's an abundance of dollars relative to goods and services. That creates a massive rebound in inflation.

What Drives Surplus and Deficits?

I've told investors over and over again that raising interest rates will not reduce deficit spending. I demonstrate that point using the following chart:

There is no correlation. There can be correlation without causation, but it is extremely difficult to argue for causation without correlation. By this point in the article, we've probably had a few people already skip to the comments section to yell that higher rates will stop the deficit. It didn't work for 80 years, but they don't need facts when they have emotions.

I'll give you a chart where there is a strong correlation:

You can see the negative correlation, right? We can flip the red line upside down by multiplying it by negative 1:

That's a strong connection. Unemployment rates and deficit spending have a massive connection. If you agree with the theory that higher unemployment reduces tax revenue and increases spending on unemployment benefits, you'll probably agree that unemployment is one significant factor that can cause deficit spending.

Fortunately, this data set goes back even further. There is less data on unemployment than on deficits, but it still goes back to the late 1940s. We can spot five surpluses:

Unemployment: High or Low

Since unemployment reduces the production of goods and services, it means the country has fewer goods and services available. That reduction in production combined with greater debt is an awful combination. But can we really withstand low unemployment? Absolutely.

When unemployment is low, wages increase. That's true. It reduces earnings for the company. That splits companies into two general types:

1. The companies who produce goods and services desired by customers will pass on the higher price. Inflationary, but we can offset it elsewhere.

2. Companies that are failing to produce the goods and services desired by customers are unable to pass on price increases.

Companies that cannot pass on the price increases or find a way to cut costs will close. The workers will quickly be hired by other companies. That's great for the country because it means the labor was reallocated to more productive uses with minimal downtime.

Every country's economic goal should involve creating more goods and services per person. To maximize labor productivity, companies that are inefficient need to close. That's part of capitalism at work. Capitalism works by reallocating capital and labor toward more productive uses. Low unemployment is perfect for that.

Low Unemployment and Inflation

Low unemployment increases supply, which is great. However, the sequence of higher wages and higher prices can create a problem as inflation could run ahead of targets. We've already seen that lower unemployment goes with lower deficit spending. Low unemployment has been a necessity to achieve even a small surplus.

How can inflation be prevented with low unemployment? A bigger surplus. That removes dollars from the economy. Removing dollars from the economy by running a surplus can be "deflationary", but that's hardly an issue today. It would counteract the "Wage-Price Spiral".

Wage-Price Spiral

I hate the term wage-price spiral.

The argument about wage-price spirals is constantly used to justify attacking wages AFTER prices increase. Here's a nice image to demonstrate:

The description from Economics Help runs into the same issue. I've improved their description by adding everything that isn't black text:

This is the problem with most wage-price spiral arguments. They suggest that inflation in the price of goods and services is okay, but inflation in the price of labor is not okay.

Conclusion

The latest CPI report was excellent. We are at five consecutive months of weak inflation. The Federal Reserve may still push rates too high. They are focused on lagged data and using a tool that has an impact in the future instead of immediately. That puts a significant delay between the data they are looking at and the impacts of their actions.

We're not predicting rates will fall immediately or even that the Federal Reserve will stop hiking right away. December will still likely see the target rate increased from a range of 3.75% - 4.00% to a range of 4.25% - 4.5%. We may still see a few hikes early next year also, though they are unnecessary.

Americans rooting for a surplus (or dramatically lower deficits) should be rooting for low unemployment, not higher interest rates. Low unemployment has an extremely strong correlation with surpluses and all five surpluses involved unemployment below 4%.

On the other hand, higher interest rates have absolutely never prevented deficits. There is zero short-term correlation. Over long periods the impact of higher interest rates obviously increases deficits. It should be pretty obvious that compounding high-interest-rate debt is bad for budgets. If someone doesn't understand the idea of cutting interest expenses, they need Dave Ramsey more than Seeking Alpha.

Investors may continue to hear about the wage-price spiral. The best way to solve that spiral is not to crush wages, but to increase supply. That happens naturally with low unemployment as labor is reallocated to more productive uses. However, that takes time. To handle the inflationary impact of higher wages, the solution is surpluses. Surpluses have the benefit of pulling dollars out of the economy and reducing federal debt at the same time.

Can the Federal Reserve create a surplus? No. That is outside their power. However, they could stop actively pushing for larger deficits through higher interest expenses and higher unemployment.

Think we still have 6% to 7% inflation? Just wait another seven months so the old data falls off. Problem solved.