The Fed's 'Magic Show': What's the Reality Behind Monetary Policy Adjustments?

Recently, on the financial stage, the Federal Reserve has once again taken center stage, with its monetary policy adjustments playing out like a carefully orchestrated magic show—dazzling to the eyes and full of hidden intricacies. This "magic show" not only tugs at the nerves of global markets but also inadvertently exposes the absurdities and realities of the modern financial system.

Federal Reserve Governor Waller recently stated support for further rate cuts in the future, but emphasized that there is "no need to rush." This statement seems to be telling the market: "Don't worry, we'll take it slow." As a result, the pace of interest rate cuts has become as slow as a snail, with each adjustment executed cautiously, as if afraid to disturb the fragile nerves of the market. This "slow cut" strategy is both a prudent response to inflation and a delicate balance for the employment market. However, in the eyes of the market, it appears more like a carefully designed delaying tactic; the Federal Reserve seems to be waiting for a "perfect moment," which perhaps will never actually come.

At the same time as cutting rates, the Federal Reserve also announced the launch of a $40 billion per month short-term Treasury purchase program, euphemistically called "Reserve Management Purchases" (RMP). This move inevitably brings to mind the quantitative easing (QE) policies following the 2008 financial crisis. Although the Federal Reserve repeatedly emphasizes that RMP is not QE, the market sees through it. It is merely a "same soup with different seasoning" act—the Fed attempts to calm the market with a smokescreen to avoid triggering panic. However, can this self-deceptive approach really conceal the essence of monetary overissuance?

The Federal Reserve has always prided itself on its independence, but under the strong intervention of the Trump administration, this "myth" has gradually been exposed. Trump repeatedly criticized the Fed for insufficient rate cuts and even threatened to appoint a new Fed chair who favors low interest rates. Under such political pressure, the Fed's decision-making had to be more cautious, and in some cases, even required compromise. This loss of independence not only undermines the credibility of the Federal Reserve but also fills the market with uncertainty about the future direction of monetary policy.

Under the Federal Reserve's 'magic show,' the market has plunged into a carnival of low interest rates. The stock market, bond market, and cryptocurrency market have all risen, as if money were always abundant and risks always controllable. However, behind this revelry lies huge bubble risks. When the volatility of funding currency rises, the assets with the longest durations, the farthest narratives, and the most reliance on risk premiums are often the first to be squeezed. AI high-valuation chains and narrative-driven crypto assets, among others, appear precarious in this frenzy.

The Fed's monetary policy adjustments are like a magic show where absurdity and reality intertwine. In this show, we witness the caution of rate cuts, the sleight of hand of balance sheet expansion, compromises on independence, and the market's euphoria and bubbles. Yet, no matter how spectacular the show is, it cannot hide one reality: the modern financial system has become increasingly complex and fragile, and even the smallest adjustment can trigger a chain reaction. Therefore, for investors, staying clear-headed and viewing market fluctuations rationally is the best strategy to navigate this 'magic show.'