The new Federal Reserve Chair takes office, "cutting rates + shrinking the balance sheet" operations cause shockwaves, U.S. bonds, stocks, gold all come under pressure

Recently, the Federal Reserve welcomed its new chair, Kevin Woor, who proposed a combination of "cutting rates + shrinking the balance sheet" upon taking office, stirring quite a stir in the financial markets. These two seemingly contradictory measures, how exactly will they affect U.S. bonds, stocks, and gold? Today, let's discuss it in plain language.

1. First, understand what "shrinking the balance sheet" and "cutting rates" mean

• Cutting rates: lowering the interest rate at which banks lend to each other, making it cheaper for businesses and individuals to borrow money. Theoretically, this can stimulate the economy but may also push up inflation.

• Shrinking the balance sheet: the Fed reducing its "liabilities." Simply put, the Fed stops buying U.S. Treasuries (U.S. bonds), and may even sell the bonds it previously purchased. This is equivalent to withdrawing dollars from the market, a "liquidity withdrawal" action.

2. Why does "cutting rates + shrinking the balance sheet" shock the market?

Under normal circumstances, "shrinking the balance sheet" is a way to withdraw money, often accompanied by "raising interest rates" to curb inflation; while "cutting rates" is to release money and stimulate the economy, usually leading to "expanding the balance sheet" (increasing money supply). Now, Woor plans to do both simultaneously, completely breaking the usual logic, which is why global markets are confused.

3. What does the surge in U.S. bond yields mean?

U.S. bond yields recently broke through 5.2%, hitting a new high since 2007. To understand simply:
Suppose a U.S. bond with a face value of $100 matures to pay $103, the yield is 3%. If no one wants to buy it, the seller can only lower the price to $95. The buyer pays $95 and gets $103 at maturity, so the yield becomes (103-95)/95 ≈ 8%.
Therefore, the sharp rise in bond yields indicates many investors are unwilling to hold U.S. bonds, and the U.S. can only attract buyers by offering higher yields. Behind this is a global trend of multiple countries selling U.S. bonds. The Fed itself has shifted from a "big buyer" to a "seller," increasing bond supply and decreasing buyers, which naturally pushes yields higher.

4. Why is gold also "suffering" along with this?

We often say "buy gold in turbulent times," believing gold preserves value. But gold is a "non-interest-bearing asset," its attractiveness is inversely related to the yields of other assets.
When U.S. bond yields rise sharply, yields of other assets tend to rise as well, making investors more willing to put money into interest-bearing assets. Gold's appeal diminishes, and its price naturally falls. This is also why our Economic Daily warns about risks associated with gold.

5. Who will become the "big sucker" to absorb the U.S. debt?

The U.S. national debt has already reached $39 trillion and continues to grow. By 2026, over $390k in new debt will be issued annually. Previously, major buyers like China, Japan, and European allies have been selling U.S. bonds. The Fed itself is not buying but selling. Who will take on all this debt?
Currently, a new player called "stablecoins" might be a potential absorber. Stablecoins hold about $180 billion in U.S. bonds, making them the 17th largest holder of U.S. debt, but they mainly buy short-term bonds. Long-term bonds remain unappealing to investors.

6. Why does the Fed operate so "contradictorily"?

Actually, the Fed is also under pressure:

• On one hand, the U.S. pays over $1 trillion annually in interest on its debt, more than its military budget, forcing it to lower U.S. bond yields to ease the burden.

• On the other hand, shrinking the balance sheet aims to suppress inflation expectations, but the market is skeptical that this "contradictory" approach can work.

Now, global markets are watching closely for the next moves of the new Fed chair. The ongoing financial game is something we need to keep paying attention to.