The FED must cut (Weekly summary 22/03/2025)

There have been quite a few interesting events to analyze this week, and below I list the most noteworthy news. Let’s get started:

• This week, as with every FOMC meeting, all eyes were on Powell. As expected, the Federal Reserve has decided to maintain the pause on interest rates, while slowing down the pace of quantitative tightening (QT), reducing the runoff of Treasury bonds from $25B to $5B. Economic projections show no significant changes in interest rate expectations, with forecasts of 3.9% in 2025, 3.4% in 2026, and 3.1% in 2027. However, GDP growth has been revised downward—from 2.1% to 1.7% in 2025, from 2.1% to 1.8% in 2026, and from 1.9% to 1.8% in 2027. As for inflation, it is expected to range between 2.5% and 2.7% in 2025, and between 2.1% and 2.2% in 2026.

  Powell made it clear that the projections for rate cuts in 2025 haven’t increased, as the GDP downgrade is offset by a higher expected PCE, along with persistent uncertainty. He emphasized the need for more clarity before proceeding with cuts and pointed out that the Fed is in a position where it can either cut or hold rates, without rushing.

  Regarding the balance sheet, the QT slowdown has been justified by reserve liquidity and TGA flows, with the intention of proceeding more slowly and over a longer period. In the economic outlook, the probability of a recession has increased, though it remains low. Surveys show a deterioration in economic sentiment, although hard data doesn’t fully support this perception. Powell also reiterated that tariffs are not an effective tool to lower inflation and dismissed the possibility of a scenario like that of the 1970s.

  In conclusion, the Fed maintains a cautious stance and shows no urgency to cut rates as long as uncertainty persists. The slowdown in QT does not signal a dovish pivot, but rather a gradual adjustment. The risk of recession is acknowledged, though still not significant, and inflation—especially in the services sector—remains the main focus.

  

   

  Not everyone welcomed the decision, and Trump was quick to call for more proactiveness from the central bank:

  The Fed would be MUCH better off CUTTING RATES as U.S. Tariffs start to transition (ease!) their way into the economy. Do the right thing.
  — Donald Trump

  Markets are currently pricing in two rate cuts this year and a 50% chance of a third one, which I also see as almost certain.

• Hostilities in the Middle East, far from easing, seem to be gaining momentum again. The United States will continue striking the Houthis in Yemen until they cease their attacks on maritime shipping. Meanwhile, the Iran-aligned group has indicated it may escalate its actions in response to the U.S. airstrikes carried out the previous day. These airstrikes represent the largest U.S. military operation in the Middle East since Donald Trump took office in January.

  For its part, Iran has warned the U.S. not to escalate the situation. The Houthi attacks on shipping have disrupted global trade and forced the U.S. to launch costly operations to intercept missiles and drones. Although the group had suspended its attacks following a ceasefire in Gaza back in January, it has recently threatened to resume them if Israel does not allow humanitarian aid into the Gaza Strip.

  

   

  What initially seemed like a temporary and short-lived disruption (the closure of the Suez Canal), due to the global trade importance of the route, has now turned into a long-term disruption—shifting the dynamics of many maritime transport segments and giving stocks like $ZIM a second life. The effect is starting to fade (the arrival of new capacity is offsetting even the Red Sea disruption), but if hostilities resume, other segments of the shipping sector could become interesting.

  

   

• The recent call between Vladimir Putin and Donald Trump made it clear that the Russian leader is still pushing forward with his goal of mending relations with the United States, while simultaneously trying to fracture the alliance between Washington and Europe. However, in concrete terms, the outcome of the conversation was limited. While the Trump administration aimed to secure a 30-day ceasefire in Ukraine as a first step toward a broader peace agreement, Putin only agreed to a much narrower truce: a mutual suspension of attacks on energy infrastructure for one month.

  This concession allows Trump to present the negotiation as a success, as it’s the first time in over three years of conflict that both sides have agreed to partially limit hostilities. Additionally, the White House announced that talks would begin regarding a ceasefire in the Black Sea and a broader truce. Nevertheless, the agreement disproportionately benefits Russia. Ukraine has been able to strike key oil infrastructure that funds Russia’s war effort, while the vastly outgunned Ukrainian navy relies on drone and missile attacks at sea to counter Moscow’s naval dominance. With this deal, Putin neutralizes one of Ukraine’s few effective tools in the war, while continuing to make gains on the ground, especially in the Kursk region, where Russian troops are trying to retake territory lost during Ukraine’s offensive last August.

  The Kremlin made it clear that a broader ceasefire will only be possible if Ukraine does not use it to rearm and mobilize additional troops—an unacceptable condition for Kyiv. Without an escalation in economic sanctions from the United States, Putin has little incentive to alter his strategy.

  Meanwhile, Trump and his advisers have portrayed the call as a significant step toward peace, with his special envoy Steve Witkoff claiming it’s only a matter of time before a full truce is reached. Hours after the call, Ukraine and Russia accused each other of launching new attacks on energy infrastructure, raising doubts about the agreement’s viability. For Putin, halting Ukrainian attacks on his refinery network brings stability to his main source of war funding, as Ukrainian drones have already damaged 4% of Russia’s refining capacity in 2024 alone. For Kyiv, however, losing the ability to target these facilities is a serious strategic setback.

  In fact, this very week has seen continued attacks between the two countries, including strikes on energy infrastructure—the only “agreed” limit so far. A resolution to the conflict will likely come this year, but not as swiftly as markets had anticipated in recent weeks, a reality that’s also being reflected in European natural gas prices.

  

   

• After a few rough weeks, capital flows into Bitcoin ETFs are positive again, with $702M in inflows over the past five days. On the other hand, flows into Ethereum ETFs remain negative, meaning this is not yet a broad recovery in overall sector sentiment.

  

   

  Meanwhile, corporate adoption continues its course, with 80 publicly traded companies now holding the asset on their balance sheets (compared to just 33 two years ago). Overall, it’s an asymmetrical strategy on the upside (exactly what we look for in our investments), with very limited downside (only the capital allocated to this strategy) and massive potential upside if #BTC truly ends up becoming a store of value.

  

   

  Nothing stops this train.

• Permian production has been a key component of global crude oil supply since 2016, contributing approximately 4 million additional barrels per day (b/d) to global output. When including natural gas liquids (NGLs), the figure rises to nearly 7 million b/d. Currently accounting for around 7% of the world’s oil supply, the Permian has played a crucial role in preventing an even larger structural deficit in the energy market.

  However, the global oil market is now at a turning point. The Permian is losing momentum, and producers have shifted their focus from growth to asset longevity. The recent acquisition of Double Eagle by Diamondback Energy marks the end of consolidation in the region, leaving major companies in control of production. Against this backdrop, WTI prices in the $65–$75/bbl range represent the worst-case scenario for U.S. shale producers. In fact, in a meeting this week between the Trump administration and several oil & gas industry leaders, they made it clear that if the goal is to “drill baby drill,” prices of around $80/bbl WTI will be necessary.

  

   

  The current price level is high enough to maintain stable production, but not attractive enough to incentivize drilling lower-quality wells (tier 2 or 3). As a result, producers are depleting the highest-quality wells simply to avoid a production decline, creating a fragile balance in the market. The cutback in producers’ capital expenditures (CAPEX) reinforces this trend, with reduced investment in drilling and the development of new projects. This scenario suggests that, in the long term, shale’s ability to offset global supply deficits is diminishing, leaving the market more vulnerable to production shocks and shifting power and control back to OPEC+.