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

Episode Summary

Executive Summary: The episode centers on a post-FOMC debate over a hawkish Fed that is downshifting growth forecasts while raising inflation expectations and still signaling no urgency to cut rates. The hosts and Joseph Wang expand into Treasury-market plumbing, SLR deregulation, debt-ceiling/TGA refill dynamics, reserve banking policy, dollar weakness, and shifting global capital flows, concluding that macro liquidity conditions are likely to stay volatile and asset allocation should remain defensive.

Main Topics: FOMC recap and hawkish dot plot shift (Priority: 5/5): The panel reviews the Fed’s updated forecasts: slower GDP, higher unemployment, and higher PCE inflation, yet still no change in the median rate path. They interpret the meeting as more hawkish than the market initially expected, especially given the rise in no-cut projections. Powell’s data dependence vs. forward-looking caution (Priority: 5/5): Speakers argue Powell is using tariff/inflation forecasts to justify delay, despite current labor and inflation data softening. The main tension is between being 'data dependent' and waiting for anticipated inflation that has not yet shown up. Treasury market plumbing and SLR deregulation (Priority: 5/5): Joseph Wang explains the supplemental leverage ratio, why it constrains banks holding low-risk Treasuries, and why regulators may loosen it to support Treasury demand and market functioning ahead of heavy issuance and TGA rebuilding. Debt ceiling, TGA rebuild, and bill-heavy issuance (Priority: 5/5): The conversation highlights the looming August debt-ceiling X-date, subsequent Treasury General Account refill, and the Treasury’s preference for bills over coupons. The panel sees this as a major liquidity and yield catalyst, especially given limited RRP buffers. Long-end yields and fiscal dominance (Priority: 4/5): The group debates whether the 30-year Treasury can break above 5% and possibly move toward 6%. They frame this within broader fiscal dominance, where government debt management increasingly shapes monetary and market outcomes. Dollar weakness, American exceptionalism, and reserve currency risk (Priority: 4/5): The panel discusses structural dollar decline driven by fiscal deficits, tariffs, capital controls, and foreign overexposure to U.S. assets. They view reserve-currency erosion as a slow-moving but meaningful regime shift. Portfolio positioning in a fragile macro regime (Priority: 5/5): The speakers favor defensive positioning: cash, gold, inflation protection, and selective short exposure. They are cautious on equities, bonds, and even Bitcoin unless liquidity conditions improve or the Fed pivots dovish later.

Key Arguments: The Fed’s June stance is hawkish because it revised growth lower and inflation higher while keeping cuts unchanged; the practical message is that policy will likely stay restrictive until labor-market deterioration becomes unmistakable. Powell appears willing to ignore current softening data and wait for unemployment to rise before cutting, even though several labor indicators already point to weakening. The current macro data are unusually noisy because tariffs, front-loading, inventory restocking, and seasonal effects are distorting consumption, trade, and labor readings. Banks are not primarily constrained by SLR today, but a loosening could still help Treasury absorption and market functioning as issuance and TGA refill needs grow. The Treasury’s bill-heavy issuance strategy, coupled with the debt-ceiling resolution and TGA rebuild, creates upward pressure on long yields unless offset by regulatory or Fed-driven measures. A 30-year Treasury breakout above 5% looks increasingly likely to the panel, with fiscal pressures and heavy issuance acting as catalysts. A future dovish Fed chair could lower front-end rates, but that may weaken the dollar and steepen the curve rather than uniformly easing financial conditions. U.S. reserve-currency status is not likely to disappear abruptly, but the dollar’s dominance appears to be weakening through gradual capital reallocation and policy choices that discourage foreign inflows. In the near term, many traditional assets have poor risk/reward profiles, leading the speakers to prefer cash, gold, and selective short positions over broad beta exposure.

Data Points: 2025 GDP projection: 1.7% to 1.4% - Fed lowered its GDP growth forecast from the March meeting to the June update 2025 unemployment projection: 4.4% to 4.5% - Fed slightly raised year-end unemployment expectations PCE inflation projection: 2.7% to 3.0% - Fed raised inflation expectations again in the updated SEP Fed rate cuts expected by year-end: 2 cuts still the majority view - Most FOMC participants still projected two cuts despite higher inflation forecasts No-cut projections among FOMC participants: 4 to 7 members - The number of policymakers expecting zero cuts increased materially Current unemployment rate: 4.2% - Discussed as still consistent with Powell’s view of full employment despite labor softness Potentially near 4.3% unemployment: Could have been 4.3% - Panel notes the rate is very close to moving higher Core CPI month over month: 10 bps - Presented as a significant downside surprise in inflation data Headline PCE inflation: 2.1% YoY in April - Used to argue inflation is close to the Fed’s goal Bank holding company SLR: About 5% - Joseph Wang explains the current leverage ratio at the holding-company level Bank-level SLR for largest banks: About 6% - Discussed as the binding constraint for large institutions Reserves held by banks: About $3 trillion - Used to estimate the scale of interest-on-reserves payments Interest on reserves income: About $120 billion annually - Estimated current income banks earn from reserve balances Treasury General Account refill level: Around $800 billion target - Described as the level Treasury wants to rebuild toward after the debt-ceiling episode Recent TGA refill move: About $250-$220 billion to $450-$470 billion - Quarterly tax payments replenished the TGA during the episode RRP buffer available: About $150 billion - Panel notes the reverse repo facility is far smaller than in 2023 2023 analog: RRP drained by about $1 trillion - Used as the most recent comparison for a TGA refill episode Long-bond threshold: 5% - A key psychological and market level for the 30-year Treasury Potential 30-year move forecast: Up to 6%+ - One speaker says a breakout could extend roughly 100 bps higher

Pivotal Quotes: "By doing nothing, they're actually being hawkish." — Felix / host discussion: Core thesis on why a flat Fed stance becomes more restrictive as inflation falls and labor softens "We're not cutting this time, and they kept their forecast from the last time." — Joseph Wang: Explaining the Fed’s refusal to move despite weaker forward economic signals "I have a market view portfolio to help people think through about how to position. So in that portfolio, there's only two things. It's cash and gold." — Joseph Wang: Final portfolio takeaway emphasizing defensiveness and hard assets

Implications: Expect tighter financial conditions, higher long-end yield risk, and continued dollar weakness. The panel favors cash, gold, and selective shorts while watching SLR changes, TGA refill flows, and a possible Powell succession for the next macro regime shift.