Bitcoin traders stared at Federal Reserve Chairman Walsh for clues, but found nothing

Federal Reserve Chairman Kevin Wash 100 Days: Refusal to disclose next step

On Friday, Kevin Wash ushered in his 100th day as chairman of the Federal Reserve, and he continued his usual style since taking office: refusing to disclose future policy directions to the market.

The response from the cryptocurrency market to this was equally flat-with almost no fluctuations. Bitcoin briefly exceeded US$80,000 after hitting a record high this week and is basically unchanged today; the market value of the entire cryptocurrency is approximately US$2.7 trillion, down slightly 0.2% from today.

"Forward-looking guidance" is out of date.

In his keynote speech at the Kansas City Fed's Jackson Hole Symposium with the theme of "In Our Times", Washi officially announced that forward-looking guidance-that is, the Federal Reserve's practice of guiding markets by implying the direction of interest rates since the 2008 financial crisis-is, in his words,"long past the time to retire." For two decades, successive Federal Reserve chairmen have revealed their next steps in this particular speech, and Walsh used it to explain why he would not do so.

He explained that when traders make decisions based on the Fed's hints rather than raw economic data, everyone gets distorted information. Walsh called this the "Hall of Mirrors problem" and warned that the Fed and markets could eventually fall into a state where they stared at each other's expectations rather than reality. "Market participants will always try to predict our next move," he said,"but we should not condone a mechanism that allows market participants to rely mainly on the Fed to find the basis for the next deal."

Footnotes hide key information about the crypto market

The footnotes of the speech hide the most critical details for cryptocurrency traders. In arguing that both central bank money and commercial bank money should receive more attention, Walsh cited a paper he wrote in 2022 (before returning to the Federal Reserve). "A quieter, more purposeful Fed will be better able to achieve its goals," he told participants.

Although Walsh never mentioned cryptocurrencies directly, his remarks and the Federal Reserve's actions have far-reaching implications for the market. High interest rates and stubborn inflation push up borrowing costs, making bonds more attractive, drawing money away from non-yielding assets such as Bitcoin, while low interest rates or simply expectations of interest rate cuts lead to the reverse flow of money. Washi's refusal to disclose policy inclinations just happened to put traders into speculation at a critical moment when Bitcoin needed a clear signal to continue its rally above $80,000.

Inflation remains a core concern

The clearest message traders heard from the Fed chairman today was his comment that the central bank is "mainly concerned" about inflation-which is really just a cliché. However, Walsh's suggestion that the Fed still had "work to do" to curb inflation seemed hawkish enough that traders briefly sold Bitcoin: Bitcoin prices fell by about $1000 instantly after the speech, and then rebounded almost immediately.

The Fed's preferred inflation indicator-the PCE price index-is currently at an annual rate of 3.7%, almost double the Fed's 2% target. Walsh said that in the past year, 54% of the prices of goods and services tracked by the Federal Reserve have increased by more than 3%. Although this proportion is below the post-epidemic high, it is still well above the normal level before the epidemic. He did not give a timetable for when this situation would change.

Markets are waiting for the next interest rate decision

Before Walsh's speech, Bitcoin was trading at nearly $80,000, up more than 20% in the previous week-this was mainly due to the U.S. Treasury's move to buy back more long-term debt, rather than any statement from the Federal Reserve. Data from the CME Fed Observation Tool, which converts bond futures prices into the probability of interest rate changes, showed that traders have lowered the probability of a September rate hike to 38.4% from 82% a month ago, while the rest are betting that rates will remain unchanged.

Walsh did not give traders any new basis for repricing. The next interest-rate decision will be announced on September 15 - 16, along with a new round of Fed economic forecasts-the kind of forward-looking signal that Washh explained in his speech on Friday that he would rather not provide.