The Federal Reserve in Crisis and an Asymmetric AI bet
Hello traders.
The Trump DOJ has served grand jury subpoenas to Federal Reserve Chair Jerome Powell. While the official scope of the investigation concerns a June 2025 congressional testimony regarding cost overruns in the $2.5 billion renovation of Federal Reserve office buildings, the timing and aggressive nature of this legal maneuver are viewed by market participants as a pretextual escalation of the Trump administration’s campaign to force aggressive interest rate cuts.
The market is now grappling with two distinct tail risks. The first is Paralysis Risk, where the Fed, in an attempt to prove its independence, refuses to cut rates despite softening data or improved inflation metrics, keeping financial conditions tighter for longer to avoid the appearance of capitulation. The second is Capitulation Risk, where Powell is forced out or coerced, leading to a premature easing cycle that unanchors inflation expectations and reignites price instability in late 2026. The immediate reaction has been a flight to hard assets, with gold extending gains to record highs and the U.S. dollar weakening against major peers as confidence in U.S. institutional stability wavers.
