There is a high probability of another interest rate cut in the second half of the year, which shouldn't be too bad.

The current market mechanism is like a "stretched bowstring" causing a series of structural distortions.

Internal contradictions in the United States: fiscal expansion but monetary tightening. This combination of "policy mismatch" is uncommon; on one hand, the Treasury is spending money to boost the economy, with the debt snowball growing larger and larger, while on the other hand, the Federal Reserve is suppressing inflation, leading to huge interest expenses due to high interest rates. This is the core reason for Trump’s intense criticism of the Federal Reserve.

This situation of fiscal expansion combined with monetary tightening is often difficult to maintain in the long term. When debt financing becomes difficult and financial markets come under pressure, the central bank may be forced to stop raising interest rates or even shift to lowering rates or debt monetization. Trump wants to oust Powell to do just that.

Current market situation:
1. Monetary policy is tightening, and overall market credit expansion is constrained (funds become more expensive); however, fiscal spending continues to inject funds (such as infrastructure, subsidies, and national debt payments), which will still release a large amount of "liquidity" into specific chains or assets. This results in funds concentrating on "policy beneficiaries."
2. Investors engage in "hedge-style crowded trading". Against a backdrop of high interest rates and high risks, investors flock to assets with higher certainty, stronger liquidity, and benefiting from policies, such as leading tech stocks, U.S. Treasuries (short-term), leading commodities, and "new safe-haven" assets like Bitcoin. This leads to certain assets' valuations deviating from fundamentals, resulting in a liquidity "black hole" effect.
3. The private sector is "marginalized", small and medium-sized enterprises and non-mainstream assets are losing blood, corporate loans are restricted; the activity of venture capital decreases; non-mainstream markets (such as high-yield bonds and emerging markets) continue to be drained.

Would a sudden significant interest rate cut lead to a "collapse" of this situation?

Based on past experience, there will be several evolution steps:
1. In the early stages of interest rate cuts, liquidity may "overflow," potentially driving up asset prices. The market will anticipate the "turning point" and initially increase positions in originally high-concentration assets (such as leading tech stocks, gold, and Bitcoin); the FOMO effect will intensify, and prices may become even more extreme in the short term.
2. Continuous or excessive interest rate cuts may trigger a wave of "asset repricing" and "capital reallocation"; this could be a potential moment of collapse:
-A. The expectation of "bubble" in existing concentrated assets triggers capital outflow, and previously overvalued assets (such as certain leading technology companies and bonds) may experience a significant decline due to repricing;
-B, capital redistribution, non-mainstream assets experience short-term surges/high volatility, and when liquidity is "overflowing", funds begin to look for marginal targets, causing previously forgotten assets to rise rapidly. However, due to insufficient support from underlying fundamentals, the volatility is extreme, creating new sources of systemic risk.
C. The credit system is unstable, with potential triggers for financial crises and high-leverage funds re-entering the market; if regulation fails or the risks of financial intermediaries (banks, non-banks) are not addressed, it is easy to trigger a liquidity crunch;

If there is another violent interest rate cut while the fiscal policy has not yet reined in, a recurrence of the 2022 cycle may happen, but it would be more severe. However, there should still be speculation about interest rate cuts from September to December, and it is very likely not to be too bad. So friends can rest assured!

#降息 macroeconomics