Yes, you read that right. The growing chatter of fresh Federal Reserve rate cuts is making me uneasy. If I were a trader today, I’d be watching price dips below short-term moving averages closely, bracing for what might unfold into a major sell-off.
But before I dive into the why, let’s rewind to last Friday.
Powell opened the door to a September rate cut
Fed chair Jerome Powell appeared to support Fed rate cuts during his speech at Friday’s Jackson Hole. According to RaboResearch’s Global Economics and Markets team the key phrase in Powell’s speech was, “with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
Powell even acknowledged that “downside risks to employment are rising,” leaving the door open to rate cuts in September—though without any commitment. These comments ratcheted up Fed rate cut bets, sending markets, including bitcoin and ether, sharply higher.
These expected cuts arrive amid record-high fiscal spending, record valuations in stocks and crypto, a record M2 money supply not just in the U.S., but worldwide, and near-absent volatility across assets. This cocktail begs the question: how much more will cheaper borrowing cost truly move the needle?
Newsletter service LondonCryptoClub’s founders offer this perspective: “Incrementally rate cuts will have an impact on markets, but there’s much bigger drivers than the Fed right now driving this bull market. We have global monetary easing and rising stimulus, with global M2 on a tear. The US is still running wartime-level deficits of over 6% and other major economies are also ramping up their fiscal policies. The U.S. Treasury is also engaging in the ‘treasury QE’ to artificially suppress the yield curve by loading the debt issuance to the front end of the curve via T-bills.”
In other words, the Treasury has been front-loading debt issuance into short maturities, increasing demand and supply of short-term securities, which helps keep short-term interest rates low. This strategy is akin to a form of “Treasury quantitative easing” where instead of the Fed purchasing bonds directly to inject liquidity, the Treasury’s debt issuance pattern supports low yields in short duration debt.
But the question still lingers – how much stimulus is too much?
Juiced to the hilt: The U.S. economy on steroids
I can’t help but see the U.S. economy – and many developed economies – as professional bodybuilders relentlessly pumping multiple steroids into their systems to enhance their muscles.
Economists have drawn this analogy repeatedly: fiscal spending (government expenditure) and monetary policies (an increase in central bank assets) are the anabolic steroids of macroeconomics – emergency measures to breathe life back into the economy. They bulk up the economy artificially but come with long-lasting, dangerous side effects.
Jim Bianco, President of Bianco Research, called rate cuts a steroid shot to the system. JPMorgan’s David Kelly described the V-shaped recovery after the 2020 COVID crash as “a steroid kind of recovery” that will inevitably slow once fiscal steroids wear off.
But the government never stopped injecting those steroids. According to the Congressional Budget Office (CBO) and the Peter G. Peterson Foundation, a fiscal policy think-tank, fiscal spending as a percentage of GDP has remained higher than pre-pandemic levels around 23-25%, with forecasts showing sustained elevated totals in the coming years.
Some call this the Biden-era fiscal policy on steroids, continued with gusto into the Trump administration, where massive tax cuts, planned under the one big, beautiful bill, are expected to pile trillions more on the deficit.
In short: Uncle Sam has never truly come off the gear. He paused monetary steroids briefly in 2022-23 but cranked fiscal steroids way up—akin to an Olympia athlete swapping testosterone for high-powered Trenbolone.
And now? The Fed is poised to add testosterone back to the mix with rate cuts.
Approaching steroid resistance?
Continual use of steroids has consequences. In medicine and bodybuilding, sustained steroid use eventually leads to resistance —there’s a saturation point, beyond which muscles stop responding to ever-increasing steroid doses, while side effects pile up.
The body’s hormonal regulatory systems adjust by downregulating androgen receptors or altering hormone metabolism. This reduces the anabolic effects despite higher steroid doses. There have been cases of unabated use of steroids leading to organ failures and fatalities.
The biological feedback mechanisms that cause steroid resistance have a clear parallel in economics: unabated use of monetary and/or fiscal stimulus or a combination of both produces diminishing returns, meaning the law of diminishing marginal utility sets in and eventually a saturation is reached, where only side effects prevail while positives are nil. The muscle-building effects — the economic growth — plateau, but the side effects — from inflated asset bubbles to runaway debt — can become dangerous.
And that’s precisely the potential risk to the U.S. economy from the persistent stimulus measures. Unlike disciplined athletes who cycle steroids to maintain effectiveness and health, the U.S. economy has been on one steroid or another for five relentless years—never a break, never a reset.
When does the marginal efficiency turn negative? When do the side effects outweigh any benefit? Nobody knows.
But the chatter around Fed rate cuts, in a landscape where fiscal stimulus flows freely and asset prices are already at lifetime highs, feels like pushing an already overworked bodybuilder with a synthetic cocktail that risks more harm than help.
Hence, the trader in me is nervous – and worried that financial steroids could steadily lose their punch, leading to a fatality.
Omkar Godbole is co-managing editor and analyst for CoinDesk. Opinions expressed here are his own and not financial advice.