What will happen to Bitcoin after the Fed finally cuts interest rates?

In the latest episode of the Pompliano interview show, guest Darius Dale, founder and CEO of 42 Macro, joined Anthony Pompliano for an in-depth discussion on the internal divisions within the US Federal Reserve (the Fed), particularly around the issue of rate cuts. Darius pointed out that the Fed’s current split is the most severe in recent years, comparable to the deep disagreements of the mid-1990s. He noted that some members of the Fed advocate for rate cuts, while others oppose them, and some even believe rates should continue to rise. This internal conflict stems from clashing economic viewpoints, influencing policy decisions. When discussing what might happen to Bitcoin (BTC) after the Fed eventually cuts rates, Darius Dale referenced the KISS model, reminding investors how to use volatility and data to make rational decisions. Below is a summarized translation of the key points from the video.

Internal Disagreements at the Fed

Darius believes the Fed’s internal disagreements are mainly centered on differing views of the neutral interest rate. Some committee members think the neutral rate should remain high, implying no rate cuts, while others believe policy should be eased at the appropriate time. He pointed out that this division could slow the pace of the Fed’s future monetary policy, especially under the dual pressures of political and economic factors.

Is the Inflation Target Set Too Low?

Darius also emphasized that the Fed’s policy is already showing signs of structural change, reflecting a shift in its role within the global economic environment. He believes that the Fed’s monetary policy over the past few years has been too loose, especially in its pandemic response, and these policies may have negatively impacted middle- and low-income households and small businesses. Darius even suggested that the long-standing low interest rate policy may have made the economic structure less healthy, ultimately challenging overall economic stability. Furthermore, Darius argues that the Fed’s decisions are not merely technical issues but are deeply influenced by political factors. He pointed out that the Fed’s membership is closely tied to the current political environment, with certain policy decisions reflecting reactions to long-term structural changes in the economy. For example, some members believe the current inflation target is set too low and should be adjusted to 3% to address more severe economic challenges.

Neutral Rate R Value Is Underestimated

Darius stated that the current economic environment has undergone massive structural changes, making economic trend forecasting much more complex and uncertain. Using long-term inflation models, he precisely quantified the extent of these changes and compared them to past business cycles. Notably, both household and corporate sector balance sheets have seen significant increases in cash reserves. Household cash reserves have reached about $10 trillion, nearly double the pre-pandemic level, rising from around $3.5 trillion. The corporate sector has similarly doubled its cash on balance sheets to about $3 trillion, also twice the pre-pandemic amount. These changes show that despite the instability of the post-pandemic recovery, cash reserves on balance sheets demonstrate strong resilience.

These changes make it difficult to accurately determine the so-called “R value,” or the actual neutral interest rate. The neutral rate refers to the rate level that neither overstimulates economic growth nor accelerates inflation. With such dramatic shifts in economic structure, estimating this neutral rate has become extremely challenging. In addition to changes in household and corporate cash reserves, tariff policy and accelerated deglobalization are significant variables in today’s economy. These factors show that the globalization process is slowing, international trade relationships are undergoing major adjustments, and these also influence the direction of the neutral rate.

In this context, market expectations for the neutral rate have become much more volatile. Looking back at 2020 and 2021, market expectations for the nominal neutral rate hovered around 0%. However, by mid-2022, expectations quickly rose to a peak of about 4%. Since then, nominal neutral rate expectations have fluctuated between 3% and 4%. By mid-year, nominal neutral rate expectations had stabilized at around 3%, reflecting the market’s outlook for US monetary policy. However, the Fed’s internal disagreement has led to a significant gap between market expectations and actual policy direction.

The Fed’s divisions are mainly focused on views of the neutral rate. While the market generally believes the neutral federal funds rate is about 3%, within the Fed there are significant differences. Some members think the neutral rate should remain around 2.5%, while others believe it should be as high as 4%. This division means that Fed policy is influenced not only by internal views but also by the external economic environment and political factors. Ultimately, this split may impact market expectations and the implementation of US monetary policy.

K-Shaped Economy Crisis

The K-shaped economic phenomenon is deeply dividing the US, Darius pointed out. Over the past three years, the “bottom of the K” group has actually experienced a persistent recession. Although aggregate economic data seems solid, a closer look reveals that middle- and low-income families, small businesses, and interest-rate-sensitive industries have already suffered pain similar to the global financial crisis.

First, the situation of the younger generation clearly reflects the depth of the recession. Homeownership among those under 35 has fallen to 36.4%, down 4 percentage points from the 2020 high and 7 points from the 2004 historical peak, nearing record lows—highlighting the major disadvantages Millennials and Gen Z face in building wealth. Meanwhile, credit card delinquency rates have risen to 12.4%, up 5 points from the 2022 low; auto loan delinquencies have climbed to 5%, reaching financial crisis levels. Student loans are under similar pressure, showing that household finances are being squeezed by both interest rates and living costs.

The corporate sector is also polarized. Since the end of 2020, large corporations’ debt has grown 34%, with free cash flow up 38% and operating profit margins staying above 14%. In contrast, small business debt grew only 16%, but free cash flow plunged 56%, and operating margins fell from 7.3% at the start of 2022 to just 3.8%. The gap in funding costs and financial pressure is rapidly shrinking the survival space for small businesses, further strengthening big companies’ market dominance.

Darius pointed out that the main cause of the K-shaped economy is actually highly skewed fiscal policy in recent years, rather than the Fed itself. Nevertheless, Fed decisions have indeed exacerbated the divide. Its monetary policy has sought to shield the wealthy, large corporations, and less rate-sensitive sectors from recession pain, while failing to provide enough stimulus for low-income groups, small businesses, and rate-sensitive industries to recover. The result: the rich get richer as AI and large tech companies drive valuations higher, while the bottom of the economy stagnates near recession.

This structural imbalance is approaching a policy tipping point. Darius believes the next Fed chair will face an urgent choice: whether to push for structural policy reform, as the Fed did by adopting the “maximum inclusive employment” framework in 2020, but this time possibly shifting toward a “America First”-style populist economic policy to correct long-term economic polarization. He emphasized that the direction of future monetary policy will not only determine the path of inflation, but also whether the cracks in America’s K-shaped economy will continue to widen or begin to close.

KISS Model (Keep It Simple, Stupid) Interpretation for Bitcoin

Darius reviewed this year’s investment performance, calling it his best year ever—not just in absolute returns, but also on a risk-adjusted basis—highly correlated with his long-term use of the KISS model. The core spirit of KISS is “keep it simple,” using clear, systematic signals to control asset allocation, reduce drawdowns, and avoid investors’ most common mistake: taking unnecessary losses during high volatility.

Taking Bitcoin as an example, KISS reduced its position from 10% to 5% at the end of October, and to 0% on November 7. Bitcoin then fell about 23–24%, and the model successfully helped investors avoid this drop. The purpose of KISS is not to predict the market, but to decisively reduce exposure when momentum weakens, cutting “left-tail risk” and preventing major net worth hits. When momentum improves, KISS will re-increase positions, first to 5%, then back to 10%, enabling better compounding by re-entering at higher net worth levels.

Darius stressed that for those with families and assets, “avoiding volatility drag” is crucial. Buy-and-hold is simple, but major downturns can cause long-term returns to lag sharply. KISS’s value is in ensuring investors are only long when they should be, without suffering the full extent of volatility.

On a macro level, Darius believes the Fed is heading toward a structural institutional shift, with policy divisions leading to more market volatility; rates may remain high for several quarters. In an uncertain and turbulent environment, relying on KISS and trend-following systems can help investors maintain discipline, capture upside, avoid downturns, and steadily build higher net worth.

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