Jerome Powell's Last FOMC as Chair

Today's discussion revolves around the last FOMC meeting chaired by Jerome Powell and its implications for the future. It's challenging to discuss these topics without delving into politics, a realm I generally try to avoid due to its divisive nature. However, even Powell himself acknowledged the unprecedented nature of the administration's actions towards the Federal Reserve, which are arguably driven by frustration over the Fed's refusal to lower interest rates. It's important to establish an objective truth: under the previous administration, the Fed raised rates significantly, from 0.25% to 5.5%. While there was a slight drop, the overall trend was upward for years. The argument that this slight drop was a politically motivated attempt to influence an election seems weak when viewed against the backdrop of years of rising rates. Conversely, if the current administration had seen rates trend upward as they did in 2022-2023, the reaction would have been vastly different. In reality, since Trump took office, interest rates have dropped, whereas after Biden took office in 2021, rates increased substantially before a brief drop in late 2024 and 2025. Without political bias, one might conclude the Fed has done a reasonable job, despite their initial misjudgment regarding inflation being "transitory." While they made a significant mistake then, they've since worked diligently to bring inflation down and engineer a soft landing. It's plausible that the Fed would be cutting rates now if not for the escalating energy prices caused by geopolitical conflicts in the Middle East, which effectively puts them in a difficult position. Just a few months ago, multiple rate cuts were anticipated for 2026, but the energy crisis has pushed those expectations to late 2027. The administration's targeting of the Federal Reserve could undermine trust in the institution, as future Fed officials might feel pressured to comply with presidential demands to avoid similar repercussions. Many are celebrating Powell's potential departure, believing his replacement will be more inclined to lower rates. However, there's a significant misconception that lower interest rates automatically translate to lower mortgage rates. The Fed directly controls the short end of the yield curve, but its influence on the long end, where mortgage rates reside, is indirect. If the Fed lowers rates prematurely, it can actually cause the long end of the yield curve to rise, not fall. Observing the 30-year yield, we see that it has only increased since rate cuts began. This suggests that blaming the Fed solely for high mortgage rates is an oversimplification. In fact, one could argue that if the Fed had maintained rates at 5.5% for longer, the long end of the yield curve might be lower now, making housing more affordable. This is because sustained high rates slow economic activity, leading markets to price in a recession rather than reaccelerating inflation. Conversely, cutting rates before the market truly necessitates it can cause the long end to rise, thus preventing mortgage rates from falling. While I don't believe the Fed's decision to cut rates was wrong—as waiting for a recession to cut is a mistake—the absence of a recession meant there was no compelling reason for the long end of the yield curve, and consequently mortgage rates, to drop durably. Durable drops in mortgage rates typically occur when the market becomes more concerned about the labor market and a recession than about reacelerating inflation. Rising energy prices, however, shift market concerns back towards inflation. Regarding the Fed's independence, it's easy to selectively point to recent rate drops and claim political influence. However, looking at the years leading up to the election, interest rates were consistently rising, slowing down the economy. The problem with political discourse is its tendency towards black-and-white thinking, leaving little room for nuance. The Fed can make mistakes without every action being politically motivated. Their rate hikes throughout 2022, 2023, and early 2024 were a response to high inflation. A historical parallel can be drawn to Gary Gensler's departure from the SEC on January 20th, 2025. Many in the crypto community celebrated, believing it would usher in a more favorable environment. At that time, Bitcoin was at $109,000. However, since his departure, the crypto market has largely declined, with Bitcoin down 59% against gold. This is because Gensler's exit inadvertently opened the floodgates to meme coins, with presidents and influencers launching them without fear of repercussions. This led to a massive misallocation of capital within the cryptoverse, preventing Bitcoin from reaching euphoric conditions and causing social interest in crypto to trend downward for years. People lost faith in the industry as it became inundated with speculative meme coins rather than focusing on genuine utility and development. True developers migrated to AI, as their efforts to improve the crypto space were overshadowed by the allure of meme coins. The industry's focus on ETFs, strategic Bitcoin reserves, and meme coins, while attracting capital, hasn't fundamentally improved the space itself. Consequently, the market has stagnated for years, with Bitcoin trading at similar levels to November 2024. The sobering reality is that Bitcoin's valuation against gold recently returned to its 2018 levels, erasing years of outperformance. While monetary policy plays a role, the loss of faith in the industry due to its shift away from Bitcoin and towards meme coins is a significant factor. Gensler's departure, by fostering an environment ripe for fraud, inadvertently marked a turning point for the worse in crypto. This raises the question: could a similar scenario unfold with the Federal Reserve? People might celebrate Powell's departure and the prospect of a new chair eager to cut rates. However, the new chair will face the same challenges, particularly rising energy prices. There's a risk of premature rate cuts leading to another wave of inflation, or, more plausibly, inflation preventing cuts until it's too late, leading to a recession. The labor market is already showing signs of weakness, and a significant increase in layoffs could trigger a hard landing. While the new Fed chair might make the right decisions, as they are reportedly against excessive money printing, I wonder if we will look back in a few years and realize that markets were better off with Powell. The crypto market's trajectory after Gensler's departure serves as a cautionary tale: celebrating a perceived positive change can sometimes mark a detrimental turning point that only becomes evident years later. Historically, when interest rates drop aggressively, it often signals a recession, as cuts are made too late. This is a difficult position for the Fed, as cutting too early risks reigniting inflation, especially with spiking energy prices. Historically, a spike in oil prices often precedes the end of a business cycle, even if the full impact takes a year or two to materialize. The risk is that markets lose trust in the Fed if it becomes perceived as merely an extension of the executive branch, making short-term politically motivated decisions that ultimately harm the economy long-term. While money printing in 2020-2021 seemed necessary in the short term, it contributed to massive bubbles, as evidenced by stocks like Target falling below pandemic lows. Short-term fixes don't address underlying issues, and things can eventually unwind. Powell, despite the "inflation is transitory" misstep, has done a commendable job attempting to engineer a soft landing. However, the "plane hasn't landed" yet; we're still far from the runway where business cycles typically conclude. While Powell offered a decent chance of a soft landing, a new chair introduces significant uncertainty, potentially leading to a hard landing. My base case, though unpopular, is that the business cycle will conclude with a recession within the current administration, likely within the next couple of years. This shift has already been playing out, with higher-risk assets bleeding into lower-risk assets: altcoins to Bitcoin, Bitcoin to gold, and stocks to gold. Historically, when the stock market breaks down against gold from these levels, it eventually corresponds to a recession. While there might be temporary bounces, I don't believe "this time is different." Just as people celebrated Gensler's departure only to witness the subsequent decline in crypto, we might look back in 2028 and realize that markets were better off with Powell, and that the very changes people cheered on led to an eventual downturn.