Market Update - May 9, 2025

Inflation, unemployment, and indecision: the Fed’s triple threat

Fed Chair Jerome Powell made it clear at this week’s FOMC meeting that rate cuts aren’t coming until the White House gets its act together on trade. The Fed held rates steady at 4.25%–4.50%, acknowledging that both inflation and unemployment risks are rising due to tariff uncertainty. Powell’s message was essentially: we’re stuck. The Fed won’t commit to easing without clearer direction, and trade policy—entirely outside its remit—remains the wildcard. It’s a frustrating but unsurprising admission that fiscal unpredictability has effectively paralyzed monetary response.

Powell overtly acknowledged stagflation risks by noting that both inflation and unemployment could rise. The Fed added new language to its statement to underscore these concerns, and Powell hinted that tariff-induced inflation could persist well into next year. The takeaway: if price pressures endure, don’t expect support from the Fed—signaling an implicit prioritization of price stability over employment.

Powell’s repeated assertion that the economy is “doing fine” didn’t sit well with many. During the press conference, reporters pushed back, citing hard-to-ignore signs of weakness—such as a 45% drop in container ships from China since April. Powell deflected, claiming this isn’t yet reflected in the hard data, but the dissonance was obvious. His slip—saying “rate hikes” instead of “rate cuts”—only reinforced the sense that the Fed’s bias remains hawkish, despite attempts to appear patient. The reality is the Fed looks uncertain and cornered.

The futures market is still pricing in 75bps of rate cuts this year—unchanged following the meeting—highlighting market skepticism toward the Fed’s hawkish stance. Bitcoin rallied while equities flatlined, underscoring Bitcoin’s relative insulation from tariffs and economic weakness. Investors clearly aren’t convinced by the Fed’s tough talk on inflation.

Meanwhile, the ratio of earnings estimate downgrades to upgrades among S&P 500 companies continues to signal rising recession risk. The pace of aggregate analyst EPS downgrades is consistent with periods when the Fed typically begins easing, suggesting that current policy may already be too tight. Crucially, this wave of pessimism began before the Liberation Day tariffs, strengthening the argument that the Fed could be forced into knee-jerk rate cuts if conditions deteriorate further.

Finally, China’s recent decision to lower the required reserve ratio (RRR) from 1.5% to 1.4% will inject approximately 1 trillion yuan into its economy. This liquidity move likely contributed to Bitcoin’s recent price uptick and may signal the beginning of a broader global pivot toward rate cuts in response to mounting economic stress.

Historical trends show that changes in global money supply—particularly M2—tend to lead Bitcoin price movements by about two months. As central banks increasingly adopt more accommodative stances, we expect these dynamics to provide tailwinds for Bitcoin, especially as fiat currencies face depreciation pressure.

State-level Bitcoin adoption gathers momentum

In a landmark decision, New Hampshire has enacted HB 302, establishing the nation’s first Bitcoin & Digital Assets Reserve Fund. Based on the Satoshi Action Fund’s Strategic Bitcoin Reserve model, the bill:

• Authorizes the State Treasurer to purchase Bitcoin or any digital asset with a market cap exceeding $500 billion

• Caps digital asset holdings at 5% of total state funds

• Requires custody with robust, U.S.-regulated institutions

• Takes effect 60 days post-enactment

Meanwhile, a similar initiative in Arizona was also approved by the state governor, showing improving optimism for bitcoin amongst state officials.

Next week, the US will release inflation and retail sales data, where we anticipate further signs of front-loaded consumer activity driven by trade tariffs. This is likely to push both figures above current expectations, heightening concerns over stagflation. Meanwhile, the US and China will begin tariff negotiations in Switzerland this weekend, with any potential resolution expected to lift risk asset prices.