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Author: Michael Nadeau, Source: The DeFi Report, Compiler: BitpushNews
Last week, the Federal Reserve cut interest rates to a target range of 3.50%–3.75%—a move that was fully priced in and largely expected.
What really surprised the market was that the Federal Reserve announced that it would purchase US$40 billion in short-term Treasury securities (T-bills) every month, which was quickly labeled as“QE-lite”label.
In today’s report, we’ll take a closer look at what this policy has changed, and what it hasn’t.Additionally, we’ll explain why this distinction matters for risk assets.
1. “Short-term” layout
The Federal Reserve cut interest rates as scheduled.This is the third rate cut this year and the sixth since September 2024.In total, rates have been cut by 175 basis points, pushing the federal funds rate to its lowest level in about three years.
In addition to cutting interest rates, Powell also announced that the Fed will begin “Reserve Management Purchases” of short-term Treasury securities at a rate of $40 billion per month starting in December.This move was fully expected given the continued tight liquidity in the repo market and banking sector.
The current consensus view in the market (both on the X platform and on CNBC) is that this is a “dovish” policy shift.
Discussions about whether the Fed’s announcement amounted to “money printing,” “QE” or “QE-lite” immediately took over social media timelines.
Our observations:
As “market observers”, we find that the market’s psychological state still tends to be “risk-on”.In this state, we expect investors to “overfit” the policy headlines, trying to piece together bullish logic while ignoring the specific mechanisms by which policy translates into actual financial conditions.
Our view is: the Fed’s new policy is good for the “financial market pipeline”,But it’s not good for risk assets.
What is the difference between us and the market’s general perception?
Our view is as follows:
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Short-term Treasury bond purchases ≠ absorb market duration
The Fed purchases short-term Treasury bills (T-bills), not long-term interest-paying bonds (coupons).This does not remove the interest rate sensitivity (duration) of the market. -
Not suppressing long-term yields
While short-term buying may slightly reduce future long-term bond issuance, it will not help compress term premiums.Currently, about 84% of government bond issuance is short-term notes, so this policy has not substantially changed the duration structure faced by investors. -
Financial conditions have not been fully relaxed
These reserve management purchases, intended to stabilize repo markets and bank liquidity, do not systematically reduce real interest rates, corporate borrowing costs, mortgage rates or equity discount rates.The impact is localized and functional rather than broad-based monetary easing.
So, no, this is not QE.This is not financial repression.To be clear, acronyms don’t matter, call it money printing all you want, but it doesn’t deliberately suppress long-term yields by removing duration – and it’s this suppression that forces investors toward the higher end of the risk curve.
This is not currently happening.This is also confirmed by the price action of BTC and the Nasdaq since last Wednesday.
What would change our perspective?
We believe BTC (and risk assets more broadly) will have their moments.But that will happen after QE (or what the Fed calls the next phase of financial repression).
That moment comes when:
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The Fed artificially suppresses the long end of the yield curve (or sends a signal to the market).
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Real interest rates fall (due to rising inflation expectations).
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Corporate borrowing costs fall (powering tech/NASDAQ).
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Term premium compression (long-term interest rates fall).
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Equity discount rates fall (forcing investors into longer-term risky assets).
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Mortgage rates fell (driven by suppression of long-end rates).
By then, investors will smell the smell of “financial repression” and adjust their investment portfolios.We are not in this environment yet, but we believe it is coming.While timing is always tricky, our baseline assumption is that volatility will increase significantly in the first quarter of next year.
That’s what we think the short-term pattern is.
2. The bigger picture
The deeper problem is not the Fed’s short-term policy, but the global trade war (currency war) and the tension it creates at the heart of the dollar system.
Why?
The United States is moving toward the next phase of its strategy: reshoring manufacturing, reshaping the global trade balance, and competing in strategically necessary industries like AI.This goal is in direct conflict with the dollar’s role as the world’s reserve currency.
Reserve currency status can only be maintained if the United States continues to run a trade deficit.Under the current system, dollars are sent overseas to buy goods and then flow back to U.S. capital markets through a cycle of Treasury bonds and risk assets.This is the essence of Triffin’s Dilemma.
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Since January 1, 2000: More than $14 trillion has flowed into U.S. capital markets (and that’s not counting the $9 trillion in bonds currently held by foreigners).
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Meanwhile, some $16 trillion is flowing overseas to pay for goods.
Efforts to reduce the trade deficit will inevitably reduce the flow of circulating capital back to the U.S. market.While Trump touts Japan and other countries’ commitment to “invest $550 billion in American industry,” what he fails to illustrate is that Japanese (and other countries’) capital cannot exist in both manufacturing and capital markets.
We do not believe that this tension will be resolved smoothly.Instead, we expect higher volatility, asset repricing, and ultimately a currency adjustment (i.e., a depreciation of the dollar and a reduction in the real value of U.S. Treasuries).
The core idea is that China is artificially depressing the RMB exchange rate (giving its exports an artificial price advantage), while the U.S. dollar is artificially overvalued due to foreign capital investment (leading to relatively low prices for imported products).
We think,To address this structural imbalance, a forced dollar devaluation may be imminent.In our view, this is the only feasible path to address global trade imbalances.
In a new round of financial repression, the market will eventually decide which assets or markets qualify as “stores of value.”
The key question is whether U.S. Treasuries can continue to serve as a global reserve asset when the dust settles.
We believe that Bitcoin and other global, non-sovereign stores of value such as gold will play a far more important role than they do now.The reason is: they are scarce and do not rely on any policy credit.
This is the “macro pattern” setting we see.
