Bitcoin fell below $77,000 on Friday after Fed Chair Kevin Warsh revived concerns that interest rates could move higher at Jackson Hole.
Data from CryptoSlate showed Bitcoin, the largest cryptocurrency by market capitalization, dropping as low as $76,909 before recovering to $77,712 at press time. The cryptocurrency remained down about 4% over the previous 24 hours.
The decline intensified a broader crypto deleveraging event that wiped out nearly $488 million from derivatives traders as markets sharply repriced expectations for Federal Reserve policy.
Warsh revives rate-hike fears
Traders raised the probability of a September rate increase to about 60%, up from roughly 35% before Warsh’s remarks. Short-term Treasury yields also climbed, while the US dollar strengthened.
Warsh gave investors several reasons to reassess expectations that the Federal Reserve was preparing to ease monetary policy. He argued that inflation remained too high despite improved price data during the summer.
The Fed’s preferred personal consumption expenditures price index was running at 3.7% over the past year and at a 4.1% annualized pace over the past six months. Both readings remain well above the central bank’s 2% target.
Recent inflation reports had not convinced Warsh that the underlying trend had changed. He said:
“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do.”
Warsh also questioned whether current borrowing conditions were restraining demand sufficiently. Credit markets showed limited signs of policy restraint, while corporate bond spreads remained historically narrow and bank lending standards relatively easy.
He added:
“I would be hard pressed to describe broad financial conditions as restrictive.”
The combination delivered a hawkish signal to financial markets. Warsh described labor conditions as consistent with full employment, pointed to healthy consumer spending and strong business investment, and said the Fed’s “predominant focus right now should be on prices.”
For crypto traders, the implication was immediate. A resilient economy gives the Fed more room to keep monetary policy tight, while persistent inflation increases the risk that its next move could be another rate increase rather than the easier financial conditions that risk assets had been anticipating.
The two-year Treasury yield rose to a one-month high after the remarks as investors increased their bets on another rate increase.
Leveraged crypto traders suffer nearly $488 million in liquidations
The shift in rate expectations hit a crypto market that had entered Friday with substantial leveraged exposure following Bitcoin’s recent rally above $80,000.
CoinGlass recorded $487.68 million in liquidations across the cryptocurrency market during the previous 24 hours, affecting 97,691 traders. More than $200 million in positions were closed within one hour of Warsh’s speech.
Bitcoin and Ethereum led crypto liquidations as 24-hour losses reached $487.81 million across 97,772 traders. Source: CoinGlass
Long positions accounted for more than $360 million of the losses, indicating that traders positioned for further gains absorbed most of the reversal. Bitcoin positions generated about $141 million of the liquidations.
The largest individual liquidation was an $11.66 million ETH-USDT position on Binance.
Warsh’s speech also affected the gold market. Reports said gold and silver lost more than $700 billion in combined market value following the remarks.
Higher interest-rate expectations create several simultaneous headwinds for cryptocurrency markets. Rising Treasury yields increase the returns available from dollar-denominated assets, while a stronger dollar typically tightens financial conditions for speculative investments.
Expectations for more restrictive monetary policy can also reduce the liquidity that helped drive Bitcoin’s recent advance.
Friday’s reaction showed how quickly that relationship can reassert itself. Bitcoin had been trading near $80,000 before Warsh’s speech became the dominant macroeconomic catalyst. Contemporaneous reports showed the cryptocurrency falling more than 3% as rate-hike expectations increased.
Less Fed guidance could increase crypto rate volatility
Warsh offered little certainty about the Federal Reserve’s next move.
The chairman has moved away from the forward guidance used heavily by his predecessors, arguing that telegraphing policy paths can distort markets and limit the central bank’s flexibility when economic conditions change.
He also rejected the idea of giving investors a mechanical reaction function that would dictate how interest rates should respond to individual economic reports.
This approach could make upcoming inflation and employment data more important for Bitcoin and other risk assets. Traders will have fewer signals from the Fed about how policymakers intend to respond to new economic information.
Apollo Global Management Chief Economist Torsten Slok has argued that this type of policy regime could push more interest-rate moves outside Federal Reserve meeting days. Investors would continuously reprice economic data instead of waiting for policymakers to validate existing expectations.
Slok noted that since the Fed began raising rates in 2022, much of the increase in longer-term Treasury yields has occurred outside Federal Open Market Committee meetings. Inflation reports, employment data, Treasury issuance and the term premium became larger drivers of the bond market.
Warsh reinforced that philosophy on Friday, saying markets should form their own expectations rather than look primarily to the Fed for their “next trade.”
For Bitcoin, Friday offered an early example of what that environment could look like.
Warsh stopped short of committing to a September rate increase, leaving incoming data to determine whether the Fed follows through. However, his insistence that inflation remains too high, financial conditions are not particularly restrictive and interest rates remain the central bank’s main policy tool was enough to revive fears of tighter monetary policy.
