Hi and welcome to the Macro Monthly for July. Compared to the past few months, July seemed a bit slower. My main observation for the month is that the Fed renovation is expensive – it was under renovation the 2+ years I lived in DC but my sticking point with Powell is not over interest rates but that the Federal Reserve did not want to hire me – crypto is still in, open banking is now out, there are new credit score models, and the trade war may be resolved with some countries.
1. Trump Wanting Powell to Resign
Trump’s quest to get Powell out of his fed chair position seems never-ending. Sometimes I forget Trump’s second term only started a few months, so much has happened. This time Trump is using the cost of the Federal Reserve renovation to draw negative attention and criticism to Powell. We are supposed to take away that this is an exorbitant cost, Powell is not a good chair, and we need a Fed chair who will lower interest rates.
My take away is that there should be more governing from both men than these photo ops in hard hats.
Lowering interest rates prematurely, especially before we have seen the end of the tariff war could weaken the economy as inflation is still a fear. The US economy is still growing and unemployment is relatively low at around 4%, so there’s not an urgent need to stimulate the economy. So from the position of the Fed chair, the risks of cutting rates are unnecessary and larger than the risks of holding rates steady a bit longer.
As a politician, Trump wants lower rates to stimulate economic growth and make voters happy. While having lower rates and making mortgages more affordable would be great, it’s not the full picture. Here we come to what the root of this issue is. It’s not about the rates. It’s about maintaining the independence of the Fed. Without this independence, economic policy would be based around making voters happy, not keeping the economy stable. The independence of the Federal Reserve is vital to a stable economy.
For many fintech companies - lower rates would be beneficial. For lenders, there will be an increase in borrowing at lower rates. For companies that have gone public, stock prices will boost. For BNPL companies it will be easier to finance installment plans at lower rates.
Graph of Fed Funds Rate from the WSJ
2. Open Banking No Longer
As the CFPB seems to wilt away (very sad coming from a former CFPBer), so do most of its rules and regulations. This includes the roll back of Section 1033 - open banking. We already see the effect of this with JP Morgan charging aggregators like Plaid to access customer data, which JP Morgan has told fintechs would begin in September. If this progresses, and if I was a bank I too would follow JP Morgan’s lead, this could have very bad consequences for fintechs.
Depending on a company’s product, customer data is accessed and used. Whether to understand the customer’s purchase history or simply link payments and accounts, customer data is essential to the product. Paying for access leads to further questions of who is going to absorb the cost. It seems likely that the cost will be passed down to the customer (think Durbin 1.0). And if a percentage of customers are unwilling to absorb these costs and decline to use the fintech technology, say 15%, that's a margin of customers that starting fintechs will be missing out on, or operational fintechs will lose. This could impact their revenue and the price they charge to customers.
While JP Morgan won’t begin charging until September, there isn’t much time to stop it. Whether fintechs have any legal ground to bring JP Morgan to court for charging for customer data is unlikely, and even more unlikely that the CFPB or any other government agency will revive the mandate of open banking. What will this mean for innovation of fintechs in the US market? Will fintechs focus on other markets like the EU where there might be a slightly smaller market and more regulations, but a concrete mandate for open banking like PSD2?
3. GENIUS Act Is Law
The GENIUS Act passed. There is not much to say on this yet. Not enough time has passed to see what will happen or if anything has really changed. My takeaway is that a lot can change in a few months. While the government is typically thought of to move slowly, it can move fast. And this validation of stablecoin is a big win for early fintech pioneers in this space. We are also starting to see that this has some global repercussions as other governments move to create and recognize digital currencies.
One thing I am going to especially keep my eye on is how crypto credit cards are going to evolve. There are so many different things to look at that will change within the crypto umbrella, such as government issued stablecoins. I think it’s still too soon to see what’s going to come out of those, but crypto credit cards have already had a moment and will likely now come back.
From 2020 to 2022 crypto cards were rather big, such as BlockFi and Crypto.com. While cards like Crypto.com still exist, it is more niche, and others like BlockFi went bankrupt. The Genius Act doesn’t touch on crypto cards, but giving legitimacy to stablecoins opens the doorway. By making it seem more mainstream, perhaps less risky, and closer in touch with federal regulations, crypto cards could offer something more unique than a traditional credit card with points for cash back or other perks, for a more targeted demographic of users. This has already been a start to this with Coinbase and JP Morgan partnering for some linked offers.
One more crypto note here- Block entered the S&P 500 on July 23rd. With Coinbase joining the S&P 500 in May we are seeing crypto move more mainstream in multiple areas - regulatory and industry. Who will be next to enter the S&P 500?
4. FHFA Adopts Use of VantageScore 4.0
The Federal Housing Finance Agency announced on July 8th it will immediately implement the acceptance of VantageScore 4.0 for mortgages sold to Fannie Mae and Freddie Mac, which accounts for the majority of mortgages in the US. Now lenders may now choose either VantageScore 4.0 or “Classic FICO” when originating loans sold to Fannie Mae and Freddie Mac. VantageScore 4.0 includes rent, utility, and telecom payment histories, which makes about 5 million people who were ineligible under “Classic FICO” newly eligible for mortgages. This is a start to solve the problem of access to credit in the US by opening up credit markets to Americans with limited traditional credit history.
Fintechs that specialize in digital credit and lending can follow suit and use VantageScore 4.0 to lend to a wider population that may have been cut off in “Classic FICO”. This would serve to further solve the problem of access to credit by extending credit further. Fintechs doing loan origination can change their underwriting models to include VantageScore 4.0. Other fintechs can also use this data to create new predictive models and scoring strategies, or financial health apps can use it to help boost mortgage approval and give better advice. A potential problem we are going to see here is access to data. Without open banking, will the data to do any of the above, or beyond what I mentioned, be feasible? Will interest rates also play a role in this? If rates are lowered will lenders want to move to adopt VantageScore 4.0 that while more inclusive, does include more risk than “Classic FICO”. How this will look, or if anything will change given the widespread acceptance and use of “Classic FICO” is something to look out for.
FICO vs VantageScore 4.0 comparison via badcredit
5. Trade War Updates
The US and Japan have reached a trade deal, announced by Trump on July 23. Tariffs on Japanese imports will be capped at 15% and Japan will give the US $550 billion in loans and investments. There are a lot of unknowns in this package before we can understand its full impact.
The US and the EU have also avoided a trade war with a 15% tariff deal signed July 27th. Trump and EU Commission President Ursula von der Leyen agreed to the 15% tariff deal, down from the 30% that Trump threatened. The EU also agreed to purchase $750 billion in US energy products and make $600 billion in new investments in the US by 2028. This pushed US stocks further up as confidence in the economy is growing. There is a lot of talk of how Europe was in such a weak bargaining position that they would have to agree to this deal and not have more leverage. This seems like a more holistic and historical question rather than purely economical. Yet it begs the question of who exactly and what industry will this deal, as well as the other deals, most benefit?
Both of these deals, and especially the aversion of a trade war, are good news for fintechs all around. From consumers wanting to spend and borrow more, to capital being easier to and maybe also cheaper to raise, and maybe additional IPO openings as a result of a strong market bounce back. A strong market also means that people will become less risk averse, which is also good news for not just fintechs but tech companies. The Japanese investment package may also fund investments in technology that will be beneficial to helping some fintechs grow.
Bonus:
Keep an eye on how Bessent is tackling America’s debt problem. Every other article seems to argue that America’s debt will cause the country to end in 5 years, or that it will never matter. No matter what I read, given that the deficit itself is over $2 trillion a year, I think this is a problem to consider. Beyond economic concerns, how can a country that holds so much debt still manage to maintain so much political sway? What policies Bessent is going to put forward, if any - or if they are only going to happen once Powell is out- will be interesting, as will watching for the impact of Trump’s BBB on the debt.
U.S Debt Graph from the Treasury Department
