The Speech: Hawkish and Focused on Inflation
Kevin Warsh's Jackson Hole speech, meant to clarify points from July, ran longer than the 8-minute talks typical of Chairman Powell. The clear message was how hawkish it was. It opened with an analogy about going on a hike, then kept to that path - signaling the Fed could raise interest rates, at least in the near term.
Markets repriced fast. Odds of a September rate hike are now about a coin flip.
The focus was the inflation mandate. The Fed has been wrong about inflation for the past 65 months, and controlling it is its responsibility. Warsh named the 2% PCE inflation target directly. Before the speech, some in the market wondered whether the Fed would shift its inflation outlook or even move the 2% target itself. That did not happen; the 2% goal stayed.
He also said not to treat the remarks as forward guidance, pointing to 2021 as an example where such guidance may have slowed the Fed's policy response to high inflation.
Crypto's Muted Reaction
The past week brought a rebirth of the "debasement trade" - money moving into gold, other precious metals, and Bitcoin (BTC) as a hedge against a weakening dollar. When the press conference began, gold and Bitcoin both sold off, ending slightly down on the day before recovering. The hawkish tone puts the debasement story back in check, and crypto prices reflected that.
Bitcoin fell less than 1% - a calm day for an asset that often swings more than 2% either way. The muted move traces partly to a rebalance over the prior week. The market had grown imbalanced in shorts versus longs relative to spot prices, then went through a large short squeeze. Positioning has since reset into a more balanced leverage structure.
Liquidations of levered futures typically explain 50% of Bitcoin's daily price move. With positioning largely reset, there was less fuel to drive a bigger reaction to the hawkish news.
Bonds and What Comes Next
Short-term rates made a substantial move, which is what lifted the September hike bets. The 10-year yield settled down and actually backed off after the speech.
Going forward, the data to watch stays the same as before: inflation, both CPI and PCE. The labor market is fairly strong with maybe a few cracks under the surface, but no major weakness. On inflation, the recent readings have not moved toward 2%, yet markets cheered that they did not come in above expectations - in line, but still elevated, was read as acceptable.
If inflation does not make sustainable moves toward 2% at a fairly quick pace, that opens the door to a rate hike. The likely result in yields would be more flattening: the short end of the curve rising on hike expectations while inflation stays stuck above target.
Bitcoin's $80,000 Line
Bitcoin's drivers are the debasement trade, Treasury moves, and positive regulatory commentary out of Washington. The sticking point is the 80k level, which price keeps failing to clear.
The recent move ends the debate over whether the bear market has bottomed. Since February the call has been that the bottom is in. The key levels now are investor cost basis - short-term holders, active investors, and ETF cost basis - which are all congregating near $80,000. That makes it a critical line: a sustained rise above it means the average Bitcoin investor is profitable again. That could form a new area of support and become a launching point for investors to move into smaller cryptocurrencies and altcoins.
