Trump needs both Powell and stablecoins

Core Viewpoints

Although he never actively requested a meeting with Trump, Powell ultimately met with Trump. At Trump's invitation, Federal Reserve Chairman Powell met with Trump at the White House yesterday. This was their first meeting since November 2019.

The outcome of the meeting was predictable. Powell emphasized that the Federal Reserve formulates monetary policy aimed at supporting maximum employment and price stability, and all decisions will be based on careful, objective, and non-political analysis. Trump stated that the Federal Reserve's failure to cut interest rates was a mistake. While their discussions were not surprising, the overall yield on U.S. Treasuries saw a significant decline last night, with the 10-year Treasury yield dropping by 7 basis points, seemingly indicating that the market is increasingly valuing the potential thawing of the ice between the two.

Trump's meeting with Powell at this time is significant; he still emphasizes that the Federal Reserve's decision not to cut interest rates is a mistake, but whether this mistake is to be resolved by the Federal Reserve or jointly by the government and the Federal Reserve, at least the meeting will make some issues more apparent. Meanwhile, cutting interest rates may not resolve Trump's primary concern regarding Treasury yields. Behind this concern is another factor: the market's declining trust in dollar assets, and rumors of non-U.S. economies selling U.S. Treasuries after the tariff war have made long-term Treasuries a cautious area for the market.

From this perspective, the yield on U.S. Treasuries not only relates to whether the Federal Reserve will cut interest rates but also depends on the market's confidence in U.S. credit and dollar assets. The recent emergence of stablecoins seems to provide a new stabilizing factor for dollar assets, especially U.S. Treasuries. Imagine for a moment that the market's concerns about the U.S. fiscal deficit stem from tax cuts that may expand the U.S. fiscal deficit by hundreds of billions of dollars this year, and an increase in the deficit means the Treasury will need to issue more of these Treasuries, but may struggle to find buyers. If stablecoins can grow rapidly, then due to demand for underlying assets, short-term Treasuries may find new buyers.

Thus, Trump needs Powell to cut interest rates and also requires new financial instruments to help stabilize dollar assets, which may be one of the reasons the Trump administration is so enthusiastic about crypto assets.

Main Text

Although he never actively requested a meeting with Trump, Powell ultimately met with Trump. At Trump's invitation, Federal Reserve Chairman Powell met with Trump at the White House yesterday. This was their first meeting since November 2019.

The outcome of the meeting was predictable. Powell emphasized that the Federal Reserve formulates monetary policy aimed at supporting maximum employment and price stability, and all decisions will be based on careful, objective, and non-political analysis. Trump stated that the Federal Reserve's failure to cut interest rates was a mistake. While their discussions were not surprising, the overall yield on U.S. Treasuries saw a significant decline last night, with the 10-year Treasury yield dropping by 7 basis points, seemingly indicating that the market is increasingly valuing the potential thawing of the ice between the two.

As one of the indicators Trump is most concerned about (if not the only one at times), the trend of the 10-year Treasury yield captures the market's attention. Overall, the 10-year Treasury yield has remained on a downward trend this year, but the market is filled with concerns and doubts about its overall trajectory The market's expectations for interest rate cuts this year continue to be pushed back, and the magnitude of the cuts has also narrowed overall, reflecting concerns about tariffs, inflation, and fiscal policy. Clearly, these issues are the "elephants in the room," both large and very obvious.

Trump's meeting with Powell at this time is significant; he continues to emphasize that the Federal Reserve's decision not to cut rates is a mistake. However, whether this mistake is to be resolved by the Federal Reserve alone or in conjunction with the government remains unclear. At least the meeting will make some issues more visible. From Trump's perspective, raising questions is often more important than providing solutions.

Meanwhile, interest rate cuts may not resolve the issue of Treasury yields, which Trump is most concerned about. Due to worries about long-term inflation, many analysts believe that while rate cuts may lead to a decline in short-term yields, long-term rates may remain high or even rise further after a cut (due to concerns about the potential ineffectiveness of monetary policy). Behind these worries is another factor: the declining trust in dollar assets. Following the trade war, rumors of non-U.S. economies selling U.S. Treasuries have made long-term U.S. debt a cautious area for the market.

From this perspective, U.S. Treasury yields not only influence whether the Federal Reserve will cut rates but also depend on market confidence in U.S. credit and dollar assets. The recent emergence of stablecoins seems to provide a new stabilizing factor for dollar assets, especially U.S. Treasuries.

Stablecoins did not emerge overnight; they are a type of cryptocurrency designed to maintain a relatively stable price by being pegged to stable assets or through algorithmic adjustments. Stablecoins combine the transparency, decentralization, and rapid transaction characteristics of blockchain technology with the stability of traditional currencies, making them an important tool in the digital economy. As of now, stablecoins have become a significant part of the digital economy, with a market capitalization exceeding $240 billion, widely used in trading, payments, and decentralized finance (DeFi). In the long term, the potential market size for stablecoins is promising, potentially reaching $1.6 to $3.7 trillion under basic and optimistic scenarios by 2030.

In simple terms, stablecoins are a blockchain-based payment method. However, if an institution wants its issued stablecoins to be more popular, combining them with traditional financial credit is the most effective scenario. From this perspective, the backing of traditional assets related to the issuer of stablecoins, along with acceptance of corresponding financial regulation, is one of the prerequisites for their rapid development. Recently, the U.S. Senate passed a procedural motion for the dollar stablecoin bill with a vote of 66 to 32, moving it into the federal legislative stage, marking an important event for stablecoins to gain wider recognition. In other words, the inclusion of stablecoins into the formal financial regulatory system is no longer a far-fetched idea.

For dollar assets, the significance of stablecoins lies in the fact that one of the prerequisites for the issuers of stablecoins to gain broader recognition is having sufficiently liquid underlying assets. Short-term U.S. Treasuries have become one of the most recognized underlying assets (which can also earn interest). With the asset-liability ratio (leverage ratio) controlled at 1 or below, and under the premise of accepting formal financial regulation, users of stablecoins can more confidently engage in various payment scenarios Imagine for a moment that the market's concern about the U.S. fiscal deficit is due to tax cuts potentially expanding the deficit by hundreds of billions of dollars this year. An increase in the deficit means the Treasury will need to issue more government bonds, but it may struggle to find buyers. However, if stablecoins can grow rapidly, there may be new buyers for short-term U.S. Treasury bonds due to demand for underlying assets. This variable has been rarely touched upon in previous analyses.

Therefore, Trump needs Powell to lower interest rates and also requires new financial instruments to help stabilize dollar assets, which may be one of the reasons the Trump administration is so enthusiastic about crypto assets.

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