4K Footage Fuzzy in 1080 Timeline. Help?

Hi everyone. I've encountered something in Final Cut this last year that's driving me nuts. I'm hoping you can help.

I film everything in 4K and deliver in 1080. So, I make my project 1080 so I can punch in the 4K footage for closeups and what not. When I drop 4K footage into my 1080 timeline (photo #2), it looks super fuzzy, even after rendering. However, when I drop the same 4K footage into a 4K timeline (photo #1), it looks sharp and clean. What am I doing wrong?

I have "better quality" and "optimized/original" media selected for both.

I'm running an M1 Max Mac Studio with 64GB RAM.

A follow up question would be that, I know best practice is to make the project timeline the resolution you'll be delivering to the client. However, can I instead create a 4K timeline, drop in 4K footage and crop in on it as needed, render, and export at 1080 for the same resolution as if I did a 1080 timeline?

Thank you for your time and any help.