The Fed's Hike and What It Signals
The Fed did what the market wanted and what the economy likely needed. The reasoning is simple: the economy has stayed strong, the labor market is stable with a falling unemployment rate, and inflation is still too sticky - above target for about five and a half years.
Fed Chair Kevin Warsh sounded more hawkish than some expected. He said the economy is strengthening, not just strong, and called the labor market strong. The key line: this hike "removed a dose of accommodation." That framing makes clear policy was not really restrictive - it was accommodative - and the Fed is pulling back some of that, which leaves room for more hikes.
The dot plot backs this up. Take all dot plots with caution, and Warsh himself dislikes them, but most officials favor at least one more hike, maybe this year. Several think another hike next year may be needed. It depends on inflation. Unless inflation speeds up a lot, the Fed may only need one or two more hikes - slightly fewer than markets now expect.
Fixed Income: Stay Short
The curve flattened, mostly from the short end catching up (a bear flattening). This supports keeping duration short. My guidance is below-benchmark average duration; now is not the time to go long.
Yields are hard to ignore - near 5% on the 10-year, close to its highest in 19 or 20 years. But many factors can still push yields higher. Historically, does the 10-year yield peak at the start of a hiking cycle or near the end? It tends to peak near the last hike, not the first. We don't know how many hikes are coming or whether this counts as a full cycle, but going long early carries risk.
So short and intermediate terms are the better spot. The two-year Treasury yields around 4.6%. There is no reason to wait for the Fed to lift rates to that level - it may never reach it. You can earn higher yields today by taking only a bit more interest rate risk.
The Clarity Act and Crypto
The Clarity Act was blocked in the Senate. That was no surprise - skepticism ran all year that it would pass in this session, and markets did not appear to price it in. Work on the daily Polymarket odds of passage shows that, on average, those odds explain only about 4% of Bitcoin's price move on a given day. The bill was never really priced in.
It still matters as a lost catalyst. Earlier in the year, the launch of spot crypto trading at one firm and crypto ETFs at another large firm revived the institutional adoption story. Bitcoin and other cryptocurrencies rallied from their lows, with Bitcoin reaching about $83,000. Passing the act could have acted as a fundamental catalyst and reignited that adoption narrative. Without it, the crypto market is now more exposed to broader macro events.
AI Debt and Long-Term Yields
As Treasury rates inch higher, a heavy AI infrastructure capex cycle is underway. Cash flows are largely used up at many hyperscale names, so they are tapping equity and debt markets. Demand for their debt still exists, but the question is at what price. Spreads have moved up over the year. The volume of issuance is staggering. Credit ratings on many hyperscalers are still fairly strong, but the yields and spreads offered reflect the growing risk from so much more debt outstanding.
This is a risk to long-term Treasury yields. Warsh flagged it, and it helps explain why long-term yields actually rose during his press conference even as the Fed hiked. Hiking can keep inflation expectations anchored, but the strong economy, AI capex, and competition for capital can keep long-term yields high, and that pressure is not going away soon.
Monetary Policy and Crypto's Path
In theory, higher rates push the dollar higher, and cryptocurrencies are non-dollar assets, so a stronger dollar could weigh on them. But starting points matter. The crypto market has largely been in a bear market and is responding well today, so it remains to be seen whether those traditional factors will bite. Over three to four years, Bitcoin has shown low correlation to other asset classes and to actual macro factors. The open question is whether crypto picks up a fresh narrative or whether the macro story becomes the main driver from here.
