The entire risk asset system is repricing interest rate expectations.
Written by: Blockchain Knight
Last Friday night, Federal Reserve Chair Walsh delivered his first keynote speech since taking office at Jackson Hole, and this time the market seemed to understand what he wanted to convey.
Walsh presented several key figures that completely changed market expectations for the policy path.
Among the 199 sub-items that make up the PCE price index, 54% saw increases of over 3% in the past 12 months; for the past six months annualized, this proportion still stands at 49%.
Meanwhile, the overall annualized PCE inflation rate was 4.1% for the past six months and 3.7% for the past year, both well above the Federal Reserve’s 2% target.
Walsh stated: “We must be convinced that underlying inflation is moving clearly and rapidly enough toward the target. Otherwise, we still have work to do.”
This stance instantly reshaped market pricing. Before the speech, traders bet the probability of a September rate hike was only around 35%. After the speech, it jumped directly to 60%.
The two-year Treasury yield climbed to a one-month high, with the dollar strengthening in tandem.
Bitcoin’s reaction was particularly dramatic. The day before the speech, it had just broken through the $80,000 mark, then plunged, at one point dropping near $76,000.
In the derivatives market, $488 million in positions were liquidated within 24 hours, with longs losing more than $360 million.
Gold and silver markets were also hit, with reports that the precious metals sector evaporated over $700 billion in market value after the speech.
Undoubtedly, the entire risk asset system is repricing interest rate expectations.
The core support for Bitcoin’s previous rally came from concentrated capital inflows into spot ETF products. Last week, up to Walsh’s speech, U.S. spot Bitcoin ETFs had absorbed more than $1.1 billion, but on the day of the speech, Bitcoin ETFs saw fresh outflows again.
Of course, there is a more profound impact on the policy framework itself. Walsh expressly announced the abandonment of forward guidance, saying this tool “has outstayed its welcome,” replacing it with “a commitment to discipline rather than a commitment to any specific decision.”
This means the market is no longer able to easily extract clues about the next steps from the Federal Reserve’s wording. For assets like Bitcoin, which are highly sensitive to liquidity and interest rates, future volatility windows may become more frequent and unpredictable.
However, the market does have some hedging forces. The Treasury announced that starting September 9, the maximum liquidity repurchase for 10 to 20-year and 20 to 30-year nominal bonds will be increased from $2 billion per transaction to at least $4 billion. This move aims to improve long-term Treasury trading conditions, indirectly favoring risk appetite.
But the Treasury made it clear this is routine debt management, not quantitative easing.
The next stage of market pricing will revolve around several key events. Before the mid-September FOMC meeting, there are still the August jobs report and CPI data to be released, as well as another vote on the Clarity Act.
If inflation numbers remain high, the probability of a rate hike will rise further, placing greater pressure on risk assets. Conversely, if the data unexpectedly softens, the momentum for ETF capital inflows may be reignited.
Whether Bitcoin can withstand new market turbulence largely depends on whether a series of subsequent data continues to press down on the inflation indicators Walsh is concerned about, and whether ETF demand can keep flowing in.
