When liquidity replaces productivity: Analyzing the economic dilemma under the Federal Reserve's "hawkish rate cuts"

Author: arndxt

Compiled by: Tim, PANews

When the Federal Reserve deliberately extends the maturity of its holdings of government bonds to suppress long-term yields (the so-called reversal operations and QE2, QE3), it signals that economic downturn and quantitative easing will occur simultaneously.

Powell’s metaphor of “driving in the fog” applies not only to the Federal Reserve but also reflects the current global economy. Policymakers, businesses, and investors are all navigating in zero-visibility fog, relying on liquidity-driven reflexes and short-term interests to move forward.

The new policy framework exhibits characteristics of limited visibility, fragile confidence, and liquidity-driven distortions.

1. The Fed’s Hawkish Rate Cuts

This time, the rate range was lowered by 25 basis points to 3.75%-4.00% in a “risk management” operation. Rather than being an easing policy, it is more about leaving room for future choices.

Amid opposition voices from two members with opposing views, Powell has effectively sent a clear signal to the market: slowing down, with policy visibility now completely vanished.

The economic data disruption caused by the government shutdown has put the Fed in a state of blind driving. Powell’s message to traders is clear: there is no guarantee of a rate cut in December. As the market gradually digests the shift from “data-dependent” to “data vacuum cautiousness,” the probability of rate cuts sharply declines, and the front-end yield curve flattens.

2. Liquidity Game of 2025

Repeated backstops by central banks have regularized speculative behavior. Liquidity, rather than productivity, now determines asset performance. This dynamic has driven up valuations while also weakening credit in the real economy.

The discussion extends to a sober understanding of the current financial architecture: passive investment centralization, algorithmic reflexivity, and retail options frenzy.

Passive fund flows and quantitative trading dominate liquidity; volatility is now determined by holdings rather than fundamentals.

Retail investors’ purchases of call options have led to gamma squeezes, creating artificial price swings in “meme” stocks, while institutional funds flood into leading stocks with increasingly narrow ranges.

The host calls this the “Financial Hunger Games”: in this system, structural inequality and policy reflexivity are forcing retail investors into speculative survival strategies.

3. Outlook for 2026: Capital Expenditure Boom and Risks

The AI capital expenditure wave reflects the industrial transformation at the end of the tech giants’ cycle: currently supported by liquidity, but in the future constrained by leverage sensitivity.

While corporate profits remain strong, a fundamental change is underway: tech giants are shifting from light-asset cash cows to heavy-asset infrastructure operators.

Initially supported by cash flow, AI and data center construction now rely on record-breaking debt issuance (e.g., Meta’s $25 billion oversubscribed bonds).

This transformation implies squeezed profit margins, increased depreciation costs, and ultimately refinancing pressures, foreshadowing a shift in the next credit cycle.

4. Economic Structural Review: Trust, Inequality, and Policy Cycles

From Powell’s cautious tone to reflections after the last podcast episode, a common theme is gradually emerging: concentration of power and erosion of trust.

Policies continue to bail out large institutions, exacerbating wealth concentration and weakening market integrity. The coordinated actions of the Fed and Treasury—from quantitative tightening to Treasury bond purchases—reinforce this trend, maintaining abundant top-tier liquidity while ordinary households struggle under stagnant wages and rising leverage.

The current decisive macro risk is no longer inflation but systemic fatigue. Markets seem to be thriving, but trust in fairness and transparency is disintegrating—that is the real systemic issue of the 2020s.