All roads lead to inflation: Fed cut or not, Bitcoin may stand to gain
News Summary
The article posits that regardless of whether the Federal Reserve cuts interest rates, the U.S. is on an inflationary path. President Trump is pressuring the Fed for aggressive rate cuts (300 basis points), aiming to bring rates down to 1.25%-1.5%. If the Fed complies, cheap money will flood the economy, risk assets will surge, and inflation will accelerate, with core PCE potentially climbing above 4% by 2026. This would likely weaken the dollar (DXY possibly below 90) and cause 10-year Treasury yields to surge above 5.5% after a brief dip, leading to U.S. debt interest payments rising to $2 trillion (6% of GDP) by 2026, triggering a debt servicing crisis and further pressuring the dollar. The article warns that the politicization of the Fed would threaten its independence, potentially causing markets to lose faith in U.S. monetary policy, akin to Turkey's cautionary tale, ultimately raising borrowing costs and curbing investment. Even if the Fed holds steady, inflationary pressures will still arise from two fronts: trade tariffs, whose impact is already visible in rising input costs shown by the July S&P Global Composite PMI; and the “Big Beautiful Bill,” which the IMF has warned risks destabilizing public finances with its deficit-increasing measures. In this scenario, core PCE may drift up to 3.0%-3.2%, 10-year Treasury yields could reach 4.7% by next summer, and debt servicing costs would climb to $1.6 trillion (4.5% of GDP), with the dollar potentially continuing its decline. Internal Fed divisions over tariffs and rate policy could also weaken its inflation-fighting resolve.
Background
The current U.S. economic backdrop is complex, with underlying stresses beneath nominal growth. U.S. national debt stands at $37 trillion, 10-year Treasury yields hover at 4.33%, core Personal Consumption Expenditures (PCE) inflation is stuck at 2.8%, and the July Producer Price Index (PPI) surged 0.9%, tripling expectations. The U.S. dollar has fallen over 10% since January. Against this backdrop, President Donald Trump, re-elected in 2024, is openly pressuring Federal Reserve Chair Jerome Powell for aggressive interest rate cuts of as much as 300 basis points, down to the 1.25%-1.5% range, a topic brought into sharp focus at the Jackson Hole symposium. Furthermore, the Trump administration's trade protectionist policies (tariffs) and the newly passed “Big Beautiful Bill”—a fiscal stimulus combining increased spending and sweeping tax cuts—are also impacting the economy.
In-Depth AI Insights
Given the Trump administration's fiscal expansion and trade protectionist policies, what fundamental test does the Federal Reserve's independence face, and how might this reshape global capital allocation logic towards U.S. assets? The Federal Reserve's independence is under unprecedented political pressure, which is not merely about short-term rate decisions but about the erosion of its long-term credibility. If the Fed succumbs to political pressure, its trustworthiness as the central bank issuing the world's reserve currency will be damaged. Global investors will be forced to re-evaluate the risk premium on U.S. Treasuries and the dollar, potentially leading to: - Long-term erosion of the dollar's reserve status: Even if the dollar remains the primary reserve currency in the short term, its appeal as a “risk-free” asset will decline, accelerating de-dollarization trends. - Structural increase in U.S. borrowing costs: Markets will demand higher yields to compensate for monetary policy uncertainty and inflation risks, exacerbating the U.S. fiscal deficit burden. - Global asset reallocation: Capital may shift from dollar-denominated assets to assets in other currency blocs with stronger sovereign credit, as well as non-sovereign alternatives like gold and Bitcoin. Considering the U.S.'s growing debt burden and an inevitable inflationary path, does this signal the 'end' of traditional fixed income investing, and what new forms of value storage might investors seek? The article states that inflation is