The Next Phase Of The U.S. Just Started
In a Nutshell
Kevin Walsh’s first Fed meeting this week will set the tone for a three-step plan to cut short-term rates, steepen the yield curve, and permanently loosen banks’ Supplemental Leverage Ratio so they can absorb the Treasury’s massive issuance—effectively delivering QE through the banking system. That plan is on hold because the Iran conflict has closed the Strait of Hormuz, pushed oil and inflation higher, and flattened the curve, threatening to break the bond market before the SPR runs out in ~80 days. Markets will surge on any dovish signal that inflation is “transitory” or that the Fed stands ready to backstop Treasuries, and fall if Walsh stays hawkish; until the Iran deal reopens the strait, the whole “growth-without-inflation” strategy remains stalled.
These notes were generated by AI and may contain inaccuracies.
A deal between Iran and the United States has allegedly been agreed to and will supposedly be signed on Friday of this week. There are still many details that could cause the deal to fall through. If the deal goes through, the next phase of the master plan can begin. The US and Iran have reached a framework to end the fighting with a signing set for Friday. Regardless of what happens on Friday, the next phase of the economy starts on Wednesday because on June 17th Kevin Walsh will chair his first Federal Reserve meeting. This will be one of the most important meetings in a long time because what he says will determine what happens to interest rates, the stock market, and arguably the whole economy.
The CME Fed Watch tool shows a 97.4% chance there will be no changes to the federal funds rate. The stock markets have already fully priced in this reality. The meeting is important because what Kevin Walsh says on Wednesday will matter more than what he does. Gold just closed below the 200-day moving average 3 days in a row, the longest streak since October 2023. The last time this happened, the bond market almost broke. The Treasury Secretary panicked and injected liquidity by buying bonds. As a result, the price of gold went on to triple over the next 2 years. The last time this occurred, what followed was a significant multi-year rally across gold, stocks, and risk assets.
Kevin Walsh was nominated as Fed chair by Trump. From day one, there was a clear vision of what Kevin was supposed to do. Trump wanted him to lower interest rates because Trump wants the economy to grow. Jerome Powell did not want to lower interest rates because the US has a huge debt problem. The plan was to solve these problems without triggering a crisis.
Step one: Kevin Walsh lowers interest rates. The Fed only controls the short-term interest rate for bonds like the two-year treasuries. This makes borrowing cheaper in the short end, loosens the economy, and gives Trump the growth story heading into the midterms. Step two: At the same time, the Fed starts shrinking its balance sheet, meaning the Fed will stop holding as many bonds. Normally when the Fed sells bonds, that pushes long-term interest rates up, which is actually intentional here because it creates a steeper yield curve. A steeper yield curve means banks can borrow money cheaply in the short term and make more money in the long end. This is free money for the banks through the spread they rely on to make money. For this to happen, short-term rates have to be lower and long-term rates have to be higher.
Step three is to deregulate the banks by removing the capital requirements that limit how many Treasury bonds banks are allowed to hold. This regulation is called the supplemental leverage ratio or SLR. It is a post-2008 financial crisis rule that required banks to hold a certain amount of money as a buffer against their total assets including Treasury bonds. Banks have hit a wall because they want to buy more treasuries but the regulation says it is full. When COVID hit in 2020, the Fed temporarily exempted treasuries from the SLR calculation for about a year. Banks instantly piled their money into treasuries and the bond market started to function very smoothly. When the exemption ended in March 2021, banks had to lower their treasury holdings and the bond markets did not like that. Kevin Walsh's plan is to make that COVID exemption permanent or at least significantly loosen the SLR so banks can hold way more treasuries without it counting against their capital requirements.
Once those limits come off, banks pile into treasuries with huge amounts of leverage. They will borrow money cheaply, buy bonds, and pocket the spread. By doing that, the banks absorb all the Treasury bonds the Fed will sell. The Fed shrinks its balance sheet and the commercial banks expand. The net effect on the bond market is almost identical to the Fed just buying the bonds itself. This is basically quantitative easing, or money printing, but laundered through the commercial banking system instead of the Fed's balance sheet. If someone says the Federal Reserve is printing money again and that it is inflationary, the Fed can say they are not because they are reducing their balance sheet. By removing the lending constraints on the banks, they can now buy treasuries and lend money to Main Street. Kevin Walsh can say he is doing productive deregulation, the banks are helping small businesses, and it is helping Main Street, not Wall Street. At the end of the day, it is a Rube Goldberg machine for money printing.
Kevin Walsh wrote in the Wall Street Journal that AI would be a massive disinflationary force. People will become more productive at their job because of AI, so the price of stuff will come down just like the tech boom of the 1990s. The story becomes that rates are being cut, banks are being deregulated to fuel growth, and AI is driving down inflation. The US can grow its way out of the debt problem without anyone feeling any inflationary pain. This was Kevin Walsh's master plan. That is why the stock market was pricing in rate cuts just a few months ago.
On April 1st, Trump announced military actions against Iran. Almost right away, the Strait of Hormuz, which controls 20% of the world's oil, got shut down. Oil prices went up. When oil goes up, inflation goes up. When inflation goes up, interest rates tend to go up to slow it down. This is catastrophic for Kevin Walsh's plan because the whole thing depends on short-term interest rates going down. If short-term rates can be lowered, the yield curve can be steepened. In a healthy economy, the spread between the 2-year and the 10-year Treasury interest rates should usually be between 1 to 1.5%. As of this week, the spread is about 0.4%. The Iran war cut it by more than half. When that happens, banks stop buying treasuries because they are risking money for 30 years to make almost nothing.
Kevin Walsh walks into his first Fed meeting on Wednesday inheriting this situation. Path one: He signals that looser policy is coming, meaning he subtly hints that interest rates will go down later this year. He may say the Fed will step in to support the bond market if things get worse. If he says that, the markets will read that as liquidity incoming. Historically when that happens, gold, stocks, Bitcoin, and risk assets go up. This path gets everything moving again and gets Kevin Walsh's plan back on track, but only if the Iran situation resolves soon. Without that, there will be higher gas prices and higher inflation, making it hard for him to say he is going to lower rates.
Path two: He acts hawkish. He says inflation is still a concern and the economy might be strong. A jobs report showed 172,000 new jobs, which is almost double what the expectation was. In a normal world, a strong jobs report means a strong economy, which is good news. But right now, the market is interpreting it as the opposite because a strong economy with high inflation means rates have to stay high or go higher. If Kevin Walsh stays hawkish and rates stay the same, expect stocks, gold, and Bitcoin to go lower.
97.4% of the market already expects no change to the rates on Wednesday. The rate decision itself is not the news. The news is what Kevin Walsh signals about the future. Every word of his press conference on Wednesday is going to be looked at by every trader on Wall Street. The market's reaction in the after hours will tell more than what he actually says. For now, Kevin Walsh's plan is on pause. In order for it to come back to life, the Iran deal has to happen first.
The US Treasury run by Scott Bessent has to sell or refinance $8 trillion worth of bonds in the next 12 months. They have to find buyers for all of it into a market where interest rates are going up because of the Iran war, where foreign central banks are not reliable buyers of US treasuries anymore because they have been replacing US treasuries with gold, and where the main buyers right now are highly leveraged hedge funds which could be forced to sell at any moment and collapse. The US strategic petroleum reserve runs out allegedly in less than 80 days. Releasing oil from that reserve is what has been keeping gas prices from going much higher. It has been absorbing the shock of the Strait of Hormuz being closed. Once it runs out, there is nothing left to cushion the prices. Oil prices will go up, inflation goes up, short-term rates go up, and bond investors will demand higher yields.
The Iran deal is the most important part of this puzzle. The US needs to reopen the Strait of Hormuz right away before the SPR runs out, before oil goes up, before the bond market breaks, before Kevin Walsh cannot cut rates anymore, and before the whole plan to do QE but not really QE dies. Scott Bessent goes on TV and says Iran is losing the war because the US is fighting a war of optics. As long as the optics look good and people believe everything is good and a deal will be reached soon, markets will stay calm. Privately, Scott Bessent understands what game Iran is actually playing. Iran knows they do not need to defeat the US military. They just need to keep the Strait of Hormuz closed long enough for the US bond market to break. Bond prices would crash, interest rates would explode higher, and the US government would be paying so much more in interest that it can barely function. Private credit markets could break, more banks could break, and the overvalued stock market could break. This includes the crypto market too.
China is adding more fuel to the fire. At the same time as the OpenAI IPO, China announced it would spend one-tenth of that amount to recreate the same tech. This hurts US markets because it puts US valuations in question and highlights how strong China's spending power is relative to the dollar. When China announced DeepSeek, it crashed the US market by hundreds of billions of dollars. The timing of China's spending announcement with US IPOs is very intentional and strategic.
Pay attention to Kevin Walsh's language around inflation. If he says the word transitory or anything like it, that means he is suggesting that inflation from the Iran war is temporary and it will go away on its own. That would be a dovish signal and markets will most likely go up. If he sounds concerned about inflation being persistent, that is hawkish and markets will most likely go down. Watch whether he mentions the bond market specifically. If he says stress in the Treasury market or hints that the Fed has tools to support the bond market, that is him signaling that the money printer is warming up and QE will happen if it needs to happen. Gold and Bitcoin will go up almost right away if he says that. Watch the dollar as measured by the DXY index after the press conference. If the dollar weakens, that is a good sign for risk assets because it means markets are pricing in future liquidity. If the dollar strengthens and the DXY index goes up, it means tighter conditions, higher rates for longer, and more pain ahead.
No investment decisions are being made yet, but gold and silver are being watched closely. The Northstar charts on gold and silver show that there is a pullback and it is not a low-risk entry point yet. Silver has come a long way off its highs. A cleaner technical setup or a clear signal from Wednesday that the direction has changed is being waited for. The super cycle for real assets is still very young. A chart from Azure Capital shows that the cycle is only 6 years into what historically runs for 14 to 22 years. A super cycle is where money rotates from one place to another in a very big way. For roughly 15 to 20 years, financial assets dominate, stocks and bonds outperform, and money flows into paper assets. Then the pendulum swings the other way and for the next 15 to 20 years real assets dominate. Commodities, gold, silver, Bitcoin, and oil outperform. The last commodity super cycle was between 1997 and 2011 driven by globalization and China. Before that it was 1963 to 1980 driven by the breakdown of Bretton Woods and the oil shocks. The current one started around 2020. It is being driven by deglobalization, record debt, fiscal deficits, and the expansion of the money supply. All of which are structurally inflationary. Stock markets can still and will probably go up relative to the dollar. However, hard assets and commodities will go up relative to the stock market.
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