There’s a question floating around macro circles that sounds insightful but misses the point entirely:

“If M2 is already rising, why does the Fed need to cut?”

It assumes the purpose of a rate cut is to inject more money into the system — as if central banks only exist to flood balance sheets. But that’s not how it works, especially in a cycle like this. The liquidity isn’t missing. It’s dormant. The real question is: why isn’t that liquidity moving?

Liquidity Exists — But It’s Not Circulating

Global M2 is climbing again. Liquidity has technically returned. But velocity — the speed at which money moves through the economy — is still stuck near historic lows.

Why?

Because much of that capital is parked in “safe” instruments:

  • Money market funds yielding 5.25%+
  • Bank reserves earning interest at the Fed
  • Short-duration Treasuries seen as low-risk cash equivalents

This isn’t a liquidity shortage. It’s an allocation freeze.

The system is full of cash. But it’s cash with no urgency to move. Capital isn’t flowing into the real economy or risk assets because the current reward for doing nothing is still high.

The Purpose of a Cut Isn’t to Print — It’s to Reprice

Unlike QE, a rate cut doesn’t “create” money. What it does is lower the opportunity cost of standing still.

A cut shifts the risk–reward landscape. Suddenly:

  • Bond yields look less appealing
  • Growth assets — like crypto and tech — look relatively stronger
  • Credit markets begin to loosen
  • Defensive positioning starts to unwind

The pool of liquidity doesn’t expand dramatically. But its direction changes. And that shift — from safety into asymmetry — is what unlocks the next phase of the market cycle.

The Confidence Gap: Why Velocity Is Still Frozen

If money exists, but velocity doesn’t rise, it’s not a mechanical issue. It’s psychological.

Velocity stays low not because liquidity is absent — but because confidence is. Investors and consumers hold back when they expect uncertainty, volatility, or policy aggression. That’s why rate hikes kill sentiment so effectively — they signal restriction, not expansion.

A rate cut flips that signal. It tells the market:

“We’re no longer trying to choke demand. We’re managing stability.”

That message — not the cut itself — is what turns the lights back on for risk.

photo of green trees
Photo by Joakim Nådell / Unsplash

2020 Was the Blueprint — Just Magnified

In 2020, liquidity exploded due to pandemic-era QE. But money velocity stayed frozen until rate expectations shifted. Once markets were convinced that rate hikes were off the table and the path ahead was easy policy, risk assets went vertical.

Bitcoin 10x’d. Tech stocks rallied 100%. Risk-on trades dominated portfolios. And it wasn’t because M2 suddenly increased again. It was because that liquidity was finally given permission to move.

The structure today is similar:

  • Liquidity is present
  • Velocity is low
  • Confidence is lacking
  • Rate cuts would change that equation

It’s Not About Stock — It’s About Flow

This is where most macro commentators miss the point. They focus on stock — how much money is in the system — and ignore flow — how that money is moving.

But what drives markets isn’t just supply. It’s direction. Rotation. Risk appetite.

The Fed isn’t trying to create another tidal wave of liquidity. It’s trying to redirect the one already in place. And the only way to do that is to lower the yield on doing nothing — to shift the equilibrium.

That’s what a cut achieves.

Conclusion: A Cut Isn’t Fuel — It’s Ignition

A rate cut doesn’t add fuel to the fire. It sparks the fire that’s been waiting to burn.

You want to know when crypto breaks out? It’s not when liquidity is created. It’s when liquidity gets permission to reallocate. That’s what turns static capital into active flow — and charts don’t wait long after that.

In short:
The money is already printed. The cut just tells it where to go.