Senate Defeats Fed Reserve Folly; Trump Trade Twist Trashes Crypto

October 13, 2025 | Updated | Happy Columbus Day. Last week, the U.S. Senate decisively rejected an amendment to prohibit the Federal Reserve from paying interest on bank reserves by a vote of 14-83. The dangerous amendment, proposed by Senators Rand Paul (R-KY) and Elizabeth Warren (D-MA), was rejected by a wide margin. Here are the fourteen members of the Senate who had the poor judgment to vote for the proposal from Senators Paul and Warren:

Cantwell (D-WA)

Durbin (D-IL)

Hawley (R-MO)

Lee (R-UT)

Lummis (R-WY)

Markey (D-MA)

Marshall (R-KS)

Merkley (D-OR)

Murphy (D-CT)

Paul (R-KY)

Sanders (I-VT)

Scott (R-FL)

Warren (D-MA)

Welch (D-VT)

Keep this list handy. These are the fourteen members of the Senate who do not even remotely understand economics and finance, especially given the large public debt now owed by the United States. Warren probably understands the issue better than the rest, but she doesn't care about anything but publicity. We talked about why the central bank must be able to interest on bank deposits at the Fed in an earlier comment (“Should the Federal Reserve Pay Interest on Bank Reserves?”).

Why does the US central bank need to pay interest on bank deposits at the Fed? Because we have $35 trillion in public debt. The interest rate on T-bills, bank reserves deposited at the Fed and reverse repurchase agreements (RRPs) issued by the Fed must be roughly the same. Otherwise banks will sell reserves, buy T-bills and any other duration available, and drive short-term interest rates down to zero. You saw a little taste of that sort of market in March 2020 and again in April of this year. 

Paying interest on bank reserves deposited at the Fed, which are created by the open market purchases of securities, allows the central bank to defend the lower bound of interest rates (a/k/a the “floor”). Paying interest on reserves that are created when the Fed buys securities from private dealers owned by banks, like during QE in 2020-21, is part of the cost of managing the federal debt.

Remember, bank balance sheets have been inflated by QE, so  suddenly ending the Fed’s ability to manage the interest rate floor will result in some very nasty outcomes. And yes, we can end the Fed’s misguided “ample reserves” policy w/o taking away the necessary ability to pay interest on a smaller reserve base. That is the real world policy goal that ought to have the full attention of Senators Paul and Warren.   

As we discussed in our two-part interview with Alex Pollock, the Treasury is the borrower, the Fed is the banker and de facto market maker in US obligations of various tenors. The primary dealers take little risk and are really just brokers. Think of the Fed as the government's chief primary dealer. Ever since the Greenspan-FOMC nationalized the federal funds market, the central bank has taken responsibility for managing short-term interest rates, like most central banks around the world. Paying interest on reserves let’s them do this job. Otherwise, you deal with Mr. Market (h/t Jim Grant). 

The Bank Policy Institute led the charge against this reckless proposal by Senators Paul and Warren. Erik Rust, Senior Vice President & Head of Government Affairs at BPI, issued a statement:

“Prohibiting the Federal Reserve from deploying one of its key monetary policy tools would have drastic economic repercussions and ultimately cost American households and businesses by making credit less accessible and more costly. We appreciate the Senate for rejecting this harmful policy that would impose costs, not savings, on the American taxpayer. Major policy decisions that affect the banking sector’s ability to support the economy and the Fed’s ability to conduct monetary policy should be heavily scrutinized under regular order.”

Trump Tariffs China, Trashes Crypto

Meanwhile, to add to the fun last week, President Donald Trump threatened China with a substantial increase in import tariffs. This had the result of tanking the US equity markets and set us up for a shortened trading week as earnings begin and uncertainty is rising. The chart below shows Bitcoin USD (BTC-USD) vs iShares Gold Trust (IAU). 

Banks are closed tomorrow for Columbus Day. As Monday looms in Asian markets, the question to ask is whether the latest Trumpian twist in the trade war with China will continue to take global stocks lower in the coming week. Has President Trump thoughtfully created another buying opportunity a la April?  

The Invesco KBW Bank ETF (KBWB) is down since the mid-September peak, signalling that there may be some surprises to come in Q3 2025 bank earnings.  Just remember that the fastest growing loan category for US banks is non-depository financial firms that were subject to a lot of margin calls on Friday.

Perhaps more ominous, however, is the apparent correlation between stocks and crypto. We thought that the ethereal, chain-protected world of crypto was the successor to gold. Lower transaction costs, blockchain, right?

But instead, Treasury collateral and close substitutes like Ginnie Mae pass-throughs soared Friday, but stocks fell and a lot of players in the world of crypto took a real kicking. Listen to the quiet. And the number of token operations being hacked is on the rise.

Hyperliquid reportedly saw a “massive” $1.23 billion loss, this in an “unprecedented” selloff that apparently affected thousands of “wallets," reports Coincentral. That’s like money in cryptese. But is it really so extraordinary for the opaque world of tokens to completely fall apart periodically? After all, there is no market per se, just a series of pseudo news reports from equally opaque websites touting one token or another.

Crypto tokens are not securities unless they have a stated yield, so promoters can make any claim or statement without fear of sanction. In terms of true market visibility, you are really better off playing dice on the floor of Trump Casino.  

“A Satoshi-era Bitcoin whale opened over $1.1 billion in short positions against BTC and ETH just before President Donald Trump announced 100% tariffs on Chinese imports,” Trading View reports, “generating an estimated $27 million in unrealized profits as markets crashed.” 

Another remarkable aspect of last week's trade kerfuffle is that the CBOE Volatility Index (VIX) has barely moved, this after months of apparent torpor in the VIX series. The chart below from FRED shows the VIX vs the assets of the Federal Reserve System.

Charlie McElligott at Nomura (NMR) stated things succinctly on Friday afternoon: "This is a taste of the reason we’ve been pitching VIX Upside (25d10d CS to be exact) as the referred space for investor hedging “…what is set-up to be a CONVEX MOVE”…look at that VVIX move go (~110 right now, +13 vols, yikes), as “Vol of Vol” is signaling a touch of “pucker” for those Short VIX Optionality..." The VIX is down for the year, as the chart above suggests. The chart below shows the IAU gold ETF vs the S&P 500 last week.

Meanwhile, gold is positioned nicely to move higher on worries about the US government shutdown and general financial dysfunction in Washington. We keep wondering when the price appreciation in metal is going to slow the rally, but the accelerating increase in allocation to gold, silver and other strategic metals like copper seems to be driving a general revaluation in prices. Given the tight supplies for metal, especially in the US and UK, taking a short position in bitcoin may be a better trade next week than drawing a contrarian line in the sand on gold.

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