This episode dissects the Federal Reserve's latest FOMC meeting, revealing a surprisingly hawkish stance despite worsening economic projections, signaling potential headwinds for risk assets including the Crypto AI sector.
FOMC Meeting: Economic Projections and Rate Cut Hesitancy
- The Fed's updated economic projections show a downtick in expected GDP growth for 2025, from 1.7% to 1.4%.
- The unemployment rate forecast for year-end 2025 increased from 4.4% to 4.5%.
- PCE (Personal Consumption Expenditures) inflation, the Fed's preferred inflation gauge, is projected to rise from 2.7% to 3.0%.
- Despite these concerning trends, the median projection for the Fed funds rate (the target interest rate for interbank lending) still indicates two cuts this year.
- However, Felix notes a hawkish shift: "10 of them had two cuts by the end of the year, but there's an increase of FOMC members from four to seven that were projecting no cuts by the end of this year." This indicates growing internal disagreement and a less dovish outlook among policymakers.
Joseph's Analysis: A Stagflationary Outlook and a "Late" Fed
- Joseph interprets the Fed's forecast as "a bit more downbeat on the economy" and "a little bit stagflationary," pointing to revised down growth alongside upward revisions for inflation and unemployment.
- He highlights Fed Chair Powell's recent rhetoric, suggesting a departure from proactive policy. Joseph states, "he's committing to being late," implying the Fed will wait for clear signs of economic distress, particularly a rise in the unemployment rate, before considering rate cuts.
- This reactive stance is a shift from Powell's previous attempts to "get ahead" of economic downturns.
- Joseph suggests that various policy changes (immigration, fiscal, regulatory, trade) contribute to Powell's cautious, wait-and-see approach.
Quinn's Perspective: Hawkish Dot Plot and Labor Market Nuances
- Quinn observes the hawkish shift in the dot plot, a chart summarizing FOMC participants' expectations for the federal funds rate, noting that for 2025, "three people went from one cut to no cut and one person went from two cuts to one cut."
- He questions the near-term market impact of the meeting, given that the earliest rate cut isn't priced in until September.
- Quinn delves into the labor market, referencing a recent report where the unemployment rate (currently 4.2%) stayed steady due to a declining total number of employed and a lower labor force participation, not job growth.
- He notes Powell acknowledged this dynamic, suggesting the Fed "will not look through that to infer a weaker labor market," reinforcing a hawkish interpretation. Quinn believes "you really need to see market weakness for them to move."
Felix's Concern: The Hawkishness of Inaction
- Felix expresses his view that Chair Powell seems to be trying to navigate his term without making significant moves.
- However, he argues that "monetary policy cannot not do anything; by doing nothing, it's still an intentional policy choice."
- By keeping rates flat while unemployment potentially rises (close to 4.3%) and inflation data shows downside surprises (like core CPI – Consumer Price Index, a measure of consumer price changes – at 0.10% month-over-month), the Fed is effectively tightening its stance.
- This inaction, Felix suggests, creates an "even more restrictive monetary policy stance," even if the intention is neutrality. This is relevant for Crypto AI investors as restrictive policies can dampen speculative investments.
Joseph on Data vs. Forecasts: The Fed's Shifting Justification
- Joseph concurs with Felix, explaining that as inflation decreases, real interest rates (nominal rates minus inflation) rise, making policy more restrictive.
- He points out that backward-looking data, such as softening labor markets (rising continuing unemployment claims, difficulty for new graduates finding jobs) and PCE inflation at 2.1% year-over-year in April (close to the 2% target), would typically warrant rate cuts.
- Joseph finds it striking that Chair Powell is now emphasizing forecasts of future inflation from tariffs, rather than current data. "Now that the data is like, we should cut. He's like, let's listen to the forecasters now... he just wants to be hawkish."
- This shift suggests the Fed is actively seeking reasons to maintain its current restrictive policy, a critical factor for investors in high-growth, risk-sensitive sectors like Crypto AI to monitor.
Conclusion: Fed's Hawkish Stance Signals Caution for Crypto AI
- The Fed's commitment to a restrictive policy, driven by future inflation fears over current disinflationary data, signals a challenging macro environment.
- Crypto AI investors and researchers should brace for continued tight liquidity, potentially impacting funding and valuations in the sector.
