The post-Powell Fed is likely to reverse the QE playbook. The strategy will involve aggressive rate cuts to lower the cost of capital, combined with deregulation (like SLR exemptions) to incentivize commercial banks to take over money creation. This marks a fundamental shift from central bank-led liquidity to private sector-led credit expansion.

While private credit faces headwinds that may lead to sluggish growth and poor returns, it is unlikely to trigger a systemic crisis. This is because linkages to the traditional banking system involve significantly less leverage in this cycle compared to the period before the 2008 Global Financial Crisis, limiting contagion risk.

Contrary to bubble fears, total credit provided to private companies (including bank loans) has grown in lockstep with the economy. The perceived explosion in private credit is actually a structural shift, with direct lenders capturing market share previously held by traditional banks.

For the past decade, the Fed was the primary driver of liquidity. Now, the focus shifts to commercial banks' willingness and ability to create credit to fund major initiatives like AI and onshoring. Investors fixated on Fed policy are missing this crucial transition.

A major regime change is underway to "reprivatize the financial system." This involves shrinking the Fed's footprint and loosening bank regulations to compel commercial banks to step back into their pre-GFC role as the primary creators of credit and market liquidity, reducing reliance on the central bank.

Despite the highest benchmark interest rates in years, the U.S. economy avoided a major wave of corporate bankruptcies. This resilience can be attributed to the explosive growth of private credit, which provided an alternative financing channel for companies when traditional bank lending became more restrictive.

Credit spreads are becoming an unreliable economic signal. The shift of issuance to private markets reduces the public supply, while the Federal Reserve's 2020 intervention in corporate debt markets permanently altered how investors price default probability.

The Federal Reserve's monetary policy is less effective today. The growth of private credit and large firms self-financing investments (like in AI) means significant economic activity is insulated from traditional bank lending channels, reducing the impact of rate hikes.

The rise of private credit has shifted finance away from a bank-centric 'hub and spoke' model. While this disperses risk from typical shocks, it makes the system more fragile in a major crisis because there is no central institution for regulators to easily stabilize and restore confidence.