The Fed's Bluff: A Market Letter

August 7, 2025

Dear Fellow Watchers of the Great Game,

Pull up a chair. We need to talk about what just happened — and more importantly, what's about to happen.

While everyone's been staring at the scoreboard (S&P up 0.73% yesterday, Apple surging 5% after some White House whispers), the real action was happening in the bond pits. Short-dated Treasury yields crumbled on Tuesday as traders placed their bets: the Federal Reserve will blink. Soon.

Here's what the math is telling us. The Fed has kept rates parked between 4.25% and 4.50% all year, playing tough guy while inflation data does its little dance around 2%. But Monday's ISM services report landed like a cold slap — slowing activity paired with sticky price pressures. The exact cocktail that makes central bankers break out in cold sweats.

The market's response? A collective shrug at the headline, then a violent rotation into the "Fed pivot" trade. Small caps rocketed 0.6% on Monday while the big boys stumbled. Russell 2000 is now up 2.2% for the week. That's not random noise. That's institutional money positioning for a rate-cut cycle that everyone knows is coming but no one wants to admit they need.

Let me paint you the real picture. Powell and company have been running the same playbook since Jackson Hole last August, when the Chairman first signaled that "the time has come" for cuts. Eleven months later, we're still waiting. Three token cuts in late 2024, then radio silence through 2025. The Fed's own projections call for two more cuts before December. The market is pricing in four.

Someone's wrong. And historically speaking, when the Fed digs in its heels this hard against market expectations while economic data starts sending mixed signals, it's usually the Fed that miscalculates.

Consider the optics. Trump's been hammering Powell to cut rates — publicly, repeatedly, with all the subtlety of a freight train. Meanwhile, the dollar's been sliding, tech's been rallying, and yield curves are doing things that would make fixed-income veterans reach for antacids. This isn't sustainable.

The tell came yesterday when Apple jumped 5% on nothing more than confirmation that they're still making phones and the White House still likes them. When mega-cap momentum returns on vapor, you know liquidity is hunting for a home. And when liquidity gets restless, central banks get nervous.

Here's my read: Powell's already lost this fight. The data's turning, the politics are brutal, and the market's calling his bluff with every Treasury purchase. The only question now is whether the Fed capitulates in September or waits for October to save face.

Either way, position accordingly. The pivot isn't coming — it's already here. We're just waiting for the press release.

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Until next time,
Keep watching the watchers