The entire risk asset system is repricing interest rate expectations.

Written by: Blockchain Knight

Last Friday evening, Federal Reserve Chairman Waller delivered his first keynote speech since taking office at Jackson Hole, and this time the market seemed to understand what he wanted to say.

Waller threw out several key numbers that completely changed the market's expectations for the policy path.

Out of the 199 components that make up the PCE price index, 54% of items have risen more than 3% over the past 12 months; this proportion remains high at 49% on an annualized basis over the past six months.

Meanwhile, the overall PCE annualized inflation rate was 4.1% for the past six months and 3.7% for the past year, both significantly above the Federal Reserve's 2% target.

Waller’s exact words were, we must be sure that underlying inflation is clearly and sufficiently moving toward the target. Otherwise, we have work to do.

This statement instantly reshaped market pricing; before the speech, traders were betting on a 35% probability of a rate hike in September, which jumped to 60% immediately after the speech.

The two-year Treasury yield surged to a one-month high, with the dollar strengthening simultaneously.

Bitcoin's reaction was particularly intense, having just broken through the $80,000 mark the day before the speech, it then plummeted, briefly falling to around $76,000.

The derivatives market liquidated $488 million in positions within 24 hours, with longs losing over $360 million.

The gold and silver markets also faced a shock, with reports indicating that the precious metals sector evaporated over $700 billion in market value after the speech.

There is no doubt that the entire risk asset system is repricing interest rate expectations.

The core support of Bitcoin's previous rebound came from concentrated capital inflows into spot ETFs. Up until Waller's speech last week, U.S. spot Bitcoin ETFs had attracted over $1.1 billion, but on the day of the speech, Bitcoin ETFs experienced outflows again.

Of course, the more profound impact lies in the policy framework itself. Waller clearly announced the abandonment of forward guidance, stating that the tool "has outlived its welcome," replaced by "a commitment to discipline rather than a commitment to a specific decision."

This means that the market can no longer easily glean clues about the next actions 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.

Of course, the market is not completely devoid of hedging forces. The Treasury has announced that starting from September 9, the maximum liquidity repurchase for nominal bonds maturing in 10 to 20 years and 20 to 30 years will increase from $2 billion to at least $4 billion per transaction. This operation aims to improve the trading conditions for long-term government bonds, indirectly benefiting risk appetite.

However, the Treasury has made it clear that this is routine debt management, not quantitative easing.

Next, market pricing will revolve around several key nodes, before the FOMC meeting in mid-September, the August employment report and CPI data are yet to be released, as well as a vote on a clear proposal.

If inflation readings continue to be high, the probability of rate hikes will further increase, putting more pressure on risk assets; conversely, if the data unexpectedly softens, the inflow momentum for ETFs may be reignited.

Whether Bitcoin can withstand the new market conflict largely depends on whether a series of subsequent data can continuously lower the inflation indicators that Waller is concerned about, and whether ETF demand can continue to flow in.