The Fed Is Still Choosing to Be “Late” On Rate Cuts | Weekly Roundup

This episode unpacks the Federal Reserve's persistent hawkish stance amidst conflicting economic data, exploring the deep implications for market liquidity, Treasury dynamics, and the strategic navigation required by Crypto AI investors and researchers in an increasingly uncertain landscape.

FOMC Meeting: A Hawkish Hold and Shifting Projections

• The Federal Open Market Committee (FOMC)—the Fed's monetary policy-setting body—maintained its current interest rates, a move largely anticipated by markets.
• Felix highlighted updated economic projections:
  • GDP for 2025 was revised down from 1.7% to 1.4%.
  • The unemployment rate projection for year-end 2025 rose slightly from 4.4% to 4.5%.
  • PCE (Personal Consumption Expenditures) inflation—the Fed's preferred inflation gauge—saw its 2025 projection increase from 2.7% to 3.0%.
• Despite these somewhat stagflationary signals (lower growth, higher inflation and unemployment), the median projection for Fed funds rate cuts remained at two for the current year.
• However, Felix noted a hawkish shift within the committee: the number of FOMC members projecting no cuts by year-end increased from four to seven.
• Joseph Wang, "Fed Guy," interpreted the Fed's stance as "a bit more downbeat on the economy" and "a little bit stagflationary." He emphasized Fed Chair Powell's commitment to being reactive: "He's just going to wait to see what the data says... he's committing to being late."
• Quinn Thompson pointed out the minimal change in 2025 rate cut expectations, with a net shift towards fewer cuts, describing it as "hawkish." He also noted Powell's acknowledgement that a stable unemployment rate, even due to a shrinking labor force, wouldn't necessarily be seen as a sign of a weaker labor market.
• Strategic Implication for Crypto AI: The Fed's commitment to being "late" on rate cuts suggests a prolonged period of tighter monetary conditions. This could constrain capital availability and increase the cost of funding for early-stage Crypto AI projects, demanding more robust financial planning from ventures in this space.

The Fed's Stance: Intentional Restriction by Inaction?

• Felix proposed that by maintaining current rates while inflation potentially falls and unemployment rises, the Fed is effectively tightening policy. This is because, as per models like the Taylor Rule (a guideline for setting interest rates based on inflation and economic output/employment), a static policy rate becomes more restrictive if economic conditions weaken or inflation undershoots.
• Joseph Wang agreed, stating, "As inflation comes down, real rates go higher." He pointed to weakening labor market indicators like rising continuing unemployment claims and difficulties for new graduates finding jobs. He also highlighted that April's headline PCE was 2.1% year-over-year, very close to the Fed's 2% target.
• Joseph observed a contradiction in Powell's approach: "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."
• Quinn Thompson offered a counterpoint, suggesting the case to cut isn't overwhelmingly strong, referencing Powell's comment that current market conditions "do not reflect very restrictive or extremely restrictive" policy, especially with equities at all-time highs.
• Strategic Implication for Crypto AI: If the Fed's inaction leads to an overly restrictive stance, it could dampen overall economic activity and risk appetite, potentially slowing investment and adoption in innovative but higher-risk sectors like Crypto AI. Researchers should monitor real rates closely.

Navigating Noisy Economic Data

• Felix highlighted the current challenge of interpreting economic data due to significant noise, such as large seasonal adjustments in retail sales and frequent revisions to Non-Farm Payroll (NFP) numbers.
• Joseph Wang acknowledged the difficulty, attributing the noise to varied behavioral responses to macro shocks like tariffs. "I think the data is going to be really noisy and I don't really know how to read it the past few months."
• Strategic Implication for Crypto AI: The unreliability of traditional economic indicators makes forecasting the macro environment more challenging. Crypto AI investors might need to rely on a broader array of data sources and be prepared for unexpected market reactions.

Supplemental Leverage Ratio (SLR) and Bank Regulation

• The discussion shifted to the upcoming Fed meeting on the Supplemental Leverage Ratio (SLR). The SLR is a regulatory requirement for banks to hold a minimum amount of capital relative to their total leverage exposure, regardless of the riskiness of assets.
• Joseph Wang explained the history: post-2008 crisis, regulations like Dodd-Frank (a comprehensive US financial reform law) and Basel III (international regulatory standards for banks) were implemented to strengthen the banking system. The SLR acts as a backstop, requiring capital against even "safe" assets like Treasuries.
• He noted that the current SLR (around 5% for bank holding companies, 6% for large banks) "has been a real hindrance for banks that traffic in assets that are very safe like treasuries."
• The Fed is considering loosening SLR requirements, possibly by exempting Treasuries or adjusting the ratio, to reduce costs for banks holding these assets, potentially increasing their demand and easing pressure on the Treasury market.
• Strategic Implication for Crypto AI: Changes to SLR could impact bank balance sheet capacity and Treasury market liquidity. While indirect, a more stable and liquid traditional financial system can reduce systemic risk, which is generally positive for investor confidence in emerging asset classes like crypto and AI-related ventures.

Treasury Issuance, Debt Ceiling, and TGA Dynamics

• Felix outlined the Treasury's strategy of issuing more bills (short-term debt) and avoiding increases in coupon (longer-term debt) issuance, a policy some call "activist Treasury issuance" or "Yellenomics."
• He also touched upon the debt ceiling dynamics, where the Treasury General Account (TGA)—the government's primary checking account—is drawn down during periods of "extraordinary measures" and then needs rapid rebuilding once the ceiling is raised. The "X-date" (when the TGA is depleted) is projected for early August.
• Quinn Thompson provided TGA figures: refilled to around $450-470 billion recently, with about $150 billion in the Reverse Repo Program (RRP)—a Fed facility where eligible counterparties can place cash overnight. He noted that during the 2023 TGA refill, the RRP drained by about $1 trillion, buffering bill issuance. This time, the RRP buffer is much smaller, and nominal coupon issuance needs are higher.
• Quinn expressed skepticism about the effectiveness of SLR changes in the current environment, contrasting it with the COVID era due to banks' "PTSD" from the 2023 banking crisis and a less rosy outlook on yields.
• Felix suggested the SLR adjustments and potential passage of the "Genius Act" (likely a misremembered or placeholder name for stablecoin regulation discussions) are attempts to "grease the runway" for the TGA rebuild, especially noting that stablecoin issuers like Tether are significant buyers of Treasury debt.
• Strategic Implication for Crypto AI: The TGA rebuild and heavy bill issuance could strain market liquidity. If stablecoin issuers play a larger role in absorbing this issuance, it could further intertwine the crypto and traditional financial systems. Crypto AI researchers should monitor how these flows impact stablecoin stability and the broader crypto market liquidity, which can affect funding and valuations in the AI sub-sector.

Long Bond Yields and Market Stability

• The conversation explored the possibility of the 30-year Treasury yield surpassing 5%, a level that has previously caused market stress.
• Joseph Wang noted that while the trend absent intervention would be for higher yields, governments have many tools, including changing issuance composition ("Yellenomics") or, historically, compelling commercial banks to buy government debt.
• Quinn Thompson believes a breakout above 5% on the 30-year yield is likely, potentially reaching over 6% later in the year, especially post-debt ceiling resolution. He warned this could be negative for risk assets, creating a "risk down, yields up" scenario where Fed cuts might exacerbate the problem.
• Strategic Implication for Crypto AI: A significant rise in long-term Treasury yields would increase the discount rate for future earnings, negatively impacting valuations for growth-oriented Crypto AI projects. It could also signal broader market instability, leading to a flight from riskier assets.

The 2026 Fed Chair Transition and Policy Uncertainty

• Felix raised the prospect of Chair Powell's term ending in 2026 and the market implications of a potentially very dovish successor, especially under a different presidential administration.
• Joseph Wang humorously referenced former President Trump's criticisms of Powell and speculated that any Trump appointee would likely be dovish. He suggested a key market impact of aggressive rate cuts would be dollar depreciation. "What they have less control of is the currency. And so that's what I would place my biggest bet on."
• Quinn Thompson agreed a dovish Fed chair would likely lead to a steeper yield curve and that market effects might even counteract the intended stimulus. He also pointed out that even significant rate cuts wouldn't immediately lower the US's overall interest expense dramatically due to the existing debt structure.
• Strategic Implication for Crypto AI: The uncertainty surrounding future Fed leadership adds another layer of complexity. A significantly more dovish Fed could devalue the dollar and spur inflation, potentially benefiting real assets or inflation hedges. Crypto AI projects with global reach or those offering solutions for a devaluing fiat system might see altered dynamics.

Fiscal Dominance and Interest on Reserve Balances (IORB)

• The discussion touched on "fiscal dominance," where fiscal policy needs dictate monetary policy. Felix mentioned Senator Ted Cruz's proposal to remove Interest on Reserve Balances (IORB)—the interest the Fed pays banks on reserves held at the Fed.
• Joseph Wang explained that IORB was introduced post-GFC when Quantitative Easing (QE)—a monetary policy where a central bank purchases assets to inject liquidity—flooded the system with reserves. Removing IORB "cold turkey" would be "tremendously disruptive," causing short-term rates to plummet as banks redeploy now zero-yielding reserves.
• He suggested that while a sudden removal is unlikely, there's scope to reduce these payments, and the Fed could do this without Congressional action.
• Quinn Thompson asserted that fiscal dominance has been present since COVID, citing instances where the Fed had to intervene due to pressures on the long-term bond market, similar to the UK's gilt crisis.
• Strategic Implication for Crypto AI: Increasing fiscal influence over monetary policy could lead to more unpredictable and potentially inflationary outcomes. Crypto AI investors should consider assets that may perform well in such an environment, and researchers might explore decentralized systems as alternatives to centrally managed ones facing political pressures.

Global Capital Flows, US Exceptionalism, and Geopolitics

• The panel discussed the theme of waning "US exceptionalism" and shifting global capital flows, particularly in light of geopolitical tensions in the Middle East and tariff policies.
• Joseph Wang observed that before recent Middle East escalations, there was a "loss of the shininess of US exceptionalism," with European markets outperforming. While US assets have done better since, he believes the "dollar safe haven bid is not really strong" and the move away from US exceptionalism is a "structural theme."
• Quinn Thompson highlighted the risk to the dollar from extreme foreign concentration in US assets. He mentioned a "blowoff top in US dominance and exceptionalism earlier this year." He also noted record short positioning in the dollar, suggesting a potential for a short squeeze before any larger decline.
• Strategic Implication for Crypto AI: A structural shift away from US assets could redirect global capital, potentially benefiting Crypto AI innovation and investment in other regions. However, geopolitical instability and a weakening dollar also create a volatile backdrop. Investors should consider geographic diversification and the resilience of projects to macroeconomic shocks.

Portfolio Strategy in a Minefield

• Felix characterized the current investment environment as one where almost every asset class has "some sort of landmine."
• Quinn Thompson stated, "I hate the risk-reward for almost every asset, and I think like the most money to be made over the next 12 months is probably on the short side of most assets." He suggested inflation-protected securities (TIPS) and being nimble with currency positions. For Bitcoin, he believes one needs to wait for actual Fed intervention and liquidity release.
• Joseph Wang shared that his model portfolio for subscribers currently holds only "cash and gold," anticipating better buying opportunities in the coming months if risks materialize and the currency declines.
• Actionable Insight for Crypto AI: The consensus leans towards a defensive posture. For Crypto AI investors, this means heightened risk management, focusing on projects with strong fundamentals and clear paths to revenue or adoption. Bitcoin's role as a potential hedge is acknowledged but with caveats about its correlation to risk assets during liquidity crunches.

The Fed's resolve to delay rate cuts, coupled with fiscal pressures and shifting global dynamics, paints a complex picture. Crypto AI investors and researchers must prioritize capital preservation, monitor liquidity conditions closely, and strategically position for a potentially volatile period where traditional safe havens and alternative assets like gold and Bitcoin may play crucial roles.