Alongside Nvidia’s blockbuster results, the Fed dominated headlines as markets priced an 85% chance of a September rate cut, with more cuts expected by spring. The catch is that these cuts are colliding with a hot economy: Q2 GDP was revised up to 3.3%, the strongest in nearly two years, powered by consumer spending and a surge in data center investment.

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Here’s the situation:
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• The Fed’s reverse repo facility, which had served as a huge cash buffer for money markets, is now nearly empty. With that cushion gone, there’s much less slack in the system to keep short-term funding stable if stress flares.
• At the same time, the Treasury is refilling its own cash balance and flooding the market with new bills, which soaks up liquidity and makes funding conditions even tighter.
• Political risk has entered the picture: Trump fired Fed Governor Lisa Cook on Monday, triggering a courtroom showdown Friday. Cook’s lawyers called it a political purge to tilt the Fed, while the White House pointed to mortgage fraud allegations. Either way, the fight reinforced fears that the Fed’s independence is eroding just as its credibility is being tested.
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Put together, it leaves the Fed in a bind. Powell is under pressure to cut rates even though growth is strong and inflation risks remain. The added perception of political interference only deepens investor doubts. For markets, rate cuts now look less like a safety net and more like fuel for future inflation — and long-term bond yields ($TBT up 1.78% Friday) are where that unease is showing up.

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