tastytrade logo
computer beating a human in chess for the first time

Sep 16, 2022

Gary Kasparov, Deep Blue, and Jerome Powell Walk into a Bar

By:Dylan Ratigan

In 1997, the world of chess reached a tipping point. It was then that IBM’s Deep Blue beat world champion Gary Kasparov in a six game match under tournament conditions. It was the first time in history that a computer beat a human and ever since, the mass computational power of computers has reigned supreme over any one individual player. We can learn a lot from that event.

Who's Responsible for Interest Rates?

Markets are essentially massive computers. The more liquid the market, the more advanced and efficient it is in pricing. No one person can outsmart it. No one person can consistently predict it. No one person can match its efficiency. So why then do we continue to believe one person or small group of people in a multi-trillion dollar market are actually responsible for setting interest rates?

There is an interesting aspect to the bond market, unique from all other tradable assets. We tend to quote bonds based on interest rates, despite them trading in dollar values. Therefore, when the Fed comes out and says something to the effect that they will set rates at 2, 3 or 4%, we don’t think much beyond that. However, interest rates are based on bond prices, therefore, when the Fed says rates will be a certain level, they are effectively setting the price for bonds. They are asserting a form of price control if we are to accept the Fed actually sets rates. Therefore, ask yourself, if the Fed told you how much bonds are worth in an open market, would any of us accept that? If so, why would there even be a need for a market?

The Federal Reserve is a Liquidity Provider

It’s time we recognize the Fed for what they actually do and don’t do. What the Fed can do is act as a liquidity provider. Much like they did after the housing crisis, they can pump money into the economy. Or conversely, they can take money out of the economy. However, where that money goes once it’s in the system is up to the market. The Fed may hope their actions lead to certain goals with respect to interest rates, but the market is the one ultimately making that call.

Evolution takes place at an accelerating pace. In 1996, Gary Kasparov tied Deep Blue when they played their first chess match. Just a year later, computational power overcame the abilities of one person and we haven’t looked back. The collective wisdom and efficiency of the market is greater than that of any of person or small group of people. The notion that interest rates and by extension, bond prices themselves can be controlled, is antithetical to the very existence of a liquid marketplace.

It’s time we make the change to accepting the Federal Reserve as a liquidity provider and nothing more. Markets set prices and those prices translate to rates. Just like people made Deep Blue, people also make markets. That computers and markets are more efficient is okay. It means we’ve played an active role in accelerating efficiency and that is a good thing.

Special Projects writer Josh Fabian contributed to this article.

Did you see this week's episode of Truth or Skepticism, We (almost) Solved The Fed's Biggest Problem? Check it out.


Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Related Posts

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com. 

tastytrade is a trademark/servicemark owned by tastytrade.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).

tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

© copyright 2013 – 2022 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on tastytrade.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.