The Breakdown - Trump Eyes Fed Shake-Up as Markets Brace for Cuts

Episode Date: July 1, 2025

Speculation swirls around who could replace Jerome Powell as Trump hints at naming a new Fed chair early—potentially upending central bank independence. NLW breaks down the leading contenders, market reactions, Trump’s radical debt issuance ideas, and why healthcare cuts and tariffs might be the real macro shocks ahead of July 4th. Source: ⁠https://www.coindesk.com/opinion/2025/06/26/whats-next-for-tokenization⁠ Brought to you by: Grayscale offers more than 20 different crypto investment products. Explore the full suite at grayscale.com. Invest in your share of the future. Investing involves risk and possible loss of principal. To learn more, visit ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Grayscale.com⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ -- ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://www.grayscale.com//?utm_source=blockworks&utm_medium=paid-other&utm_campaign=brand&utm_id=&utm_term=&utm_content=audio-thebreakdown)⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/@TheBreakdownBW Subscribe to the newsletter: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://blockworks.co/newsletter/thebreakdown⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownBW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Monday, June 30th, and today we are speculating about who the next Fed Chair might be. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly. slash breakdown pod. All right, friends, well, with the crisis in the Middle East, if not resolved, at least on a low

ebb for now, macro has reverted back to the narratives from before the missile started flying. That means debt and deficit are front of mind as Congress struggles to pass the so-called big, beautiful bill. Tariffs are still burbling in the background as key deadlines rapidly approach, but for the president, it means his attention is now back on his nemesis at the Federal Reserve. On Friday, Trump told the media, you have a guy. in there who, with the stroke of a pen, could lower interest rates and save us hundreds of billions of dollars a year. But he's a stupid person. I'm not sure if he doesn't understand it. It's kind of

economics 101. It's really more of a paper movement. You're not cutting anything. You're not cutting jobs. It's just interest rates. He went on to call Powell a, quote, stubborn mule who's making a big mistake before discussing his replacement. For Trump, there's only one criteria. Whoever's in there is going to lower rates. He continued, If I think somebody's going to keep the rates where they are or whatever, I'm not going to put them in. I'm going to put somebody that wants to cut rates. There are a lot of them out there. The comments, of course, sparked another wave of discussion about who the next Fed chair might actually be. Powell's term isn't up until next May, but the Wall Street Journal reports the administration is considering announcing the pick early to increase the pressure to cut.

The sources say that the frontrunners are current Fed Governor Kevin Warsh and National Economic Council Director Kevin Hassett. Some were reportedly pitching that Scott Bessent should be shifted over to the Fed from his current position as Treasury Secretary, and former World Bank President David Malpass and Fed Governor Christopher Waller are also in contention. CNN referred to this as a plan to appoint a shadow Fed chair. Trump said he'd love for Powell to resign, but failing that, there could be a plan to undermine Fed independence by appointing a replacement almost a year early. This would allow the administration to have their own media spokesperson to speak out against the Fed's decisions, and would also, for what it's worth, be unprecedented in the history of the institution. Alan Blinder, the vice

chairman of the Fed during the Clinton administration said, it's an absolutely horrible idea. If they're not singing from the same playbook, which seems likely, this is just going to cause confusion in markets. Bessent himself, meanwhile, downplayed the reporting of a plan to install a shadow fed chair stating, I don't think anyone is necessarily talking about that, not all that much of a denial, frankly. Besson said that the plan is to conduct interviews in September with a view to having an announcement ready in October or November. Flagging one of the mechanisms in play, Bessent noted that Governor Cougler's term is up in January, meaning the incoming Fed Chair could take that seat and then wait until Powell's time is up in May.

Besson commented, Chair Powell doesn't have to leave, he could stay on the board, not as chair. Besson also hushed to chatter that he would take the role commenting, I'll do what the president wants, but I think I have the best job in Washington. The figures under consideration were the central macro discussion over the weekend. Kevin Warsh has been gunning for Fed Chair for decades, so is likely to campaign hard for the role. At an event in Boston last week, he told the crowd, My fatal flaw is I say what I believe. If the president wants someone who is weak, I don't think I'm going to get the job.

Warsh is the only candidate in favor of drastic reforms at the Fed, so could get over on that alone. The knock on Warsh among macro analysts is that he has pretty bad instincts as a central banker. His most famous moment came in 2008 when he advocated for rate hikes heading into the crisis. As documented in the Atlantic article how the Fed let the world blow up, Warsh was more concerned about Disneyland raising ticket prices by 5% as a sign of inflation. Kevin Hassett is viewed as the pick if Trump is prioritizing loyalty. Hassant is one of the key architects of the administration's economic policy, so would likely work hand-in-glove with the White House.

That could be a double-edged sword in a market that's already skeptical of Fed independence under Trump. Predictions markets view Bessent as a long shot and believe Chimoth Palahapitia has a better chance at the job than David Malpass. That leaves Christopher Waller as the only other major candidate, with his odds currently higher than Kevin Hassett on Polly Market. As a governor, Waller has typically been quite hawkish during this cycle, although he's also been right. Waller was cautious about last year's cuts, warning that the Fed should move cautiously after a 50-bases point cut in September. That view was vindicated in January as 10-year bond rates spiked to a high of 4.8%. More recently,

Waller has been the loudest advocate for rate cuts, stating he's ready to cut in July. This could be an audition for the role of Fed chair, which requires a doveish view, but it could also be a sign that he's willing to look deeper into the data to see evidence of economic distress. Many leading banks are forecasting deep rate cuts next year, implying the Fed will be playing catch-up. Mostly, Waller is a valuable pick because he has credibility. The market doesn't view him as a Trump sycophant, so rate cuts are less likely to be seen as a political move. For our purposes, Waller has also been the most crypto-friendly Fed official. In early February, he was way ahead of the curve by dedicating an entire speech to the merits of stablecoin adoption. He's held the view that stablecoins are safe and

preferable over CBDCs since at least 2021. Joseph Wang, aka Fed guy, wrote, making Waller Fed chair probably makes the most sense. The market already knows him and is comfortable with his judgment, and Trump would get to name two loyalists to the board as replacements for Coogler and probably Powell. Said Felix Javan, host of the Forward Guidance podcast, all I know is that Waller deadlifts, and that's all I need to know. Today's episode of The Breakdown is brought to you, exclusively by Grayscale. Grayscale is almost certainly a name you know. They've been offering exposure to crypto for over a decade now

and offer over 20 different crypto investment products ranging from single asset to diversified to thematic exposure to crypto and the broader crypto industry. They have long been innovators at the intersection of TradFi and Crypto, and one of the benefits for a lot of us is that grayscale products are available right through your existing brokerage or IRA. Now, of course, investing involves risk, including possible loss of principle. For more information and important disclosures, visit grayscale.com.

Go to grayscale.com to explore their full suite of crypto investment products and invest in your share of the future. Now, going a little under the radar in Friday's comments, Trump also called for a radical departure in government debt issuance. He discussed what happens, quote, when you do the debt, likely referring to the $9.2 trillion that needs to be refinanced this year. That's around a third of all issuance coming due. Heading into this year, Scott Besson had been very clear that he wanted to push out the

maturity by issuing longer-term debt. He viewed Janet Yellen as making a mistake by issuing too many T-bells during the COVID era instead of taking advantage of ultra-low interest rates. That entire plan was premised on longer-term rates coming down over the first 100 days of the administration, but the 10 year is still above the level from November and hasn't come below 4% since then. With that plan off the table, Trump is now kicking the can. He said,

I've instructed my people not to do any debt beyond nine months or so. Trump even discussed where he'd like rates to be, telling the media, if we cut rates two points, we'd save more than $600 billion, just because you cut. But you can't go out to the market and say we have a guy who's got us 4% and we want to pay 2%. I think we should be paying 1% right now. We're paying more because we have a guy who suffers Trump derangement syndrome. Now, calling a spade to spade, anyone who follows rates knows that this isn't remotely close to how anything works. Of course, even if the Fed cut, there's no guarantee that long-dated bond rates would follow. In fact, we saw the exact opposite during last year's cuts with rates spiking alongside the first cut in September.

For those who thought Janet Yellen was running stealth QE in 2024, this change in issuance would be even more aggressive. Trader Andy Constant noted that the removal of $3.3 trillion in coupon bonds from the market would be double the pace of any QE in history, adding, Trump must be stupid or stupidly misspoke. Macro strategist Craig Shapiro wrote, If this bills over bonds issuance dynamic really happens, you can kiss the dollar goodbye. Got gold or Bitcoin? Throughout the term, markets have been tempted to dismiss what Trump says, especially when he makes outlandish suggestions. But the lesson from Liberation Day should be that the president should be taken seriously, if not totally literally. I think it's only

safe to assume that some version of this plan is being discussed as a serious option in the Oval Office. Those comments are all coming as the markets are getting in line with Trump's view of the world. Odds of a cut have moved dramatically in the two weeks since the last Fed meeting. Markets are now pricing a 74% chance of a cut in September, with two cuts by then viewed as more likely than no cuts. A single cut was around 55% odds while Powell was at the podium earlier this month. Odds for a cut at the July meeting are also rising, moving from 12% to 18%. Morgan Stanley analysts are fading the move, writing on Friday that the market will be disappointed over the summer. They anticipate the first rate cuts won't arrive until October.

The logic is that tariff inflation will show up over the coming months and that the consensus around rate cuts is still limited to just governors Waller and Bowman. Now, just because they don't think rate cuts will begin soon doesn't mean they're ruling them out for the medium term. The same analyst dropped a report earlier in the week that the first rate cuts wouldn't arrive until March of next year. However, they view seven cuts as their base case for 2026, bringing Fed funds down to 2.5%. Rate cuts in the fall are starting to seem like the base case, but their effect is still a little undetermined. In the middle of last year, we saw longer-term rates rise alongside Fed cuts, which makes the debt refinancing situation even worse.

The interest expense on the government's balance is also a major component of income flowing into the economy through bond investors. Money market funds in particular are tied directly to Fed rates, so there's a mechanical reduction of income when the cuts begin. There's always been a pocket of skepticism around whether Fed cuts actually boost economic growth during downturns, but if the economy gets rocky towards the end of the year, rate cuts in the associated reduction in income could be reflexive to the downside. Over in Congress, the focus remains on passing the big beautiful bill, which is Trump's omnibus budget measure. Vote wrangling is currently underway as GOP lawmakers try to hit a July 4th deadline imposed by Trump. While this is a kitchen sink bill, there are two

major provisions that are gathering the most controversy. The bill includes around a trillion dollars in cuts to Medicaid while extending the Trump tax cuts from 2018. Despite a ruling by the Senate parliamentarian on Friday, many of the Medicaid cuts remain in the bill. The Congressional Budget Office is evaluated that this bill will net out a $3.3 trillion increase in government deficits over the next decades, and while that increases enough to ruffle the feathers of budget hawks, there's some important nuance for macro-watchers. The tax cuts cuts are largely an extension of current provision, so likely won't represent additional stimulus coming into the economy. At the same time, the cuts to Medicaid could have a major impact.

Beyond removing health care from an estimated 12 million Americans, the loss of health care jobs could be a huge tailwind. George Washington University anticipates that up to a million jobs could be lost, and over a hundred billion could be cut from GDP over the short term. The bill includes structural changes to the way health care works in the U.S., so it could be enough to tip the industry from a job creator to a shrieking employer. The health care sector currently employs around 10% of Americans, and was projected to be around a quarter of all job growth in the coming decade. In May, healthcare, for example, represented around 45% of job growth. Now, without taking a position on the sustainability of a health care focused economy, the point is that this could be a major

macro shift with much larger impacts. Purely from an economic perspective, health care cuts could be enough to tip the economy into a recession. Now, it's, of course, very far from clear that that's exactly how it would shake out due to a range of carve-outs in the bill. After switching his vote to Yes, on Saturday, Missouri Senator Josh Hawley said that his state would actually get more funding over the next four years due to last-minute amendments. But with the bill being viewed as a large deficit increase, if it causes economic weakness, that could come as a big surprise from markets. The other macro shock coming back into the headlines is, of course, tariffs. Trump's 90-day pause is set to expire next Wednesday, and plans from the White House are a little garbled.

When asked if he plans to extend the deadline on a Sunday show, Trump said, I don't think I'll need to. Then he added, I could, no big deal. Trump's comment. from Friday were that the administration could, quote, do whatever we want. I'd like to make it shorter. I'd like to send letters out to everyone. Congratulations. You're paying 25%. Now, this lack of guidance won't help traders carry positions over the long weekend. Scott Besson was equally noncommittal. He said, we have countries approaching us with very good deals, but they might not be finalized by the July 9th deadline. The Treasury Secretary commented, if we can ink 10 or 12 of the most important 18, there are another important 20 relationships. Then I think we could have trade wrapped up by Labor Day.

You'll note that Labor Day is still more than two months out, so we have no idea what the tariff regime will look like next Thursday. It could be set at 10%, 25%, zero, or some other number of the president's choosing. Adding insult to injury, the trade deficit has actually increased by 11% in May, according to Commerce Department figures. Exports fell, while imports remained relatively unchanged. On the positive side, at least from the administration's perspective, a record 27 billion in tariffs were paid in May, and annualized pace of 300 billion. So where this all leaves us, the macro picture is extremely fuzzy. There are numerous catalysts returning to the four that aren't just Middle East bombings. And on top of all that, this week we have a speech from Powell alongside labor market data on Tuesday.

In short, the fireworks are all lined up ahead of July 4th, but we don't know if any of them will actually go off. But that is going to do it for today's breakdown. Appreciate you listening as always. And until next time, be safe and take care of each other. Peace.