Fed’s wind direction has changed again: the market is starting to bet again that the next move could be a rate hike.
The latest remarks by Federal Reserve Chair Kevin Warsh are clearly more hawkish than the market had originally expected.
This time, his core message can actually be summed up in just one sentence:
If inflation does not return to 2% with sufficiently clear and sufficiently fast speed, the Fed still has work to do.
This line is important because Warsh also believes the U.S. economy is currently not showing very strong tightening pressure.
The reasons he cited include: corporate profits remain high, consumer spending is steady, credit spreads are narrowing, and there is virtually no sign in the credit and lending markets that monetary policy is forming clear restrictive effects.
In other words:
Even though interest rates are not low, the economy seems to be able to handle it.
But if inflation continues to stay elevated, the Fed will have more room to remain hawkish—and even to resume rate hikes.
The market reaction has been very direct.
Yields on the 2-year U.S. Treasuries rose by about 5bp to 4.28%, indicating traders are raising their expectations for near-term policy rates again;
while yields on the 30-year Treasuries instead fell slightly to around 5.19%.
This combination is worth paying attention to.
The market is not really pricing in a scenario of “long-term, broad-based runaway inflation.” Rather, it looks more like:
The Fed may need to push the policy rate even higher in the near term.
So the market narrative has already shifted.
Previously, people were discussing:
When will the Fed start cutting rates?
Now it increasingly sounds like they are asking:
Will the Fed resume rate hikes again this year?
That is not a comfortable environment for risk assets.
If the market continues to raise the probability of more rate hikes, focus on:
Nasdaq / AI tech stocks — the most sensitive to valuation
BTC — liquidity expectations tightening again
2Y U.S. Treasury yields / DXY — to judge how much of Warsh’s message the market has priced in
Gold — whether inflation concerns or real rates end up taking the upper hand
Especially since BTC has just gone through a round of a sharp rebound recently; if short-end yields and the U.S. dollar both continue trending higher, bitcoin is likely to face a very direct liquidity pressure test.
So tonight, I’m not focusing as much on whether Warsh is hawkish.
Instead, it’s this:
Will the market really start trading “the next rate hike” as the Base Case?
If it does, then the K-lines for U.S. stocks and Bitcoin next may not be boring at all.
The latest remarks by Federal Reserve Chair Kevin Warsh are clearly more hawkish than the market had originally expected.
This time, his core message can actually be summed up in just one sentence:
If inflation does not return to 2% with sufficiently clear and sufficiently fast speed, the Fed still has work to do.
This line is important because Warsh also believes the U.S. economy is currently not showing very strong tightening pressure.
The reasons he cited include: corporate profits remain high, consumer spending is steady, credit spreads are narrowing, and there is virtually no sign in the credit and lending markets that monetary policy is forming clear restrictive effects.
In other words:
Even though interest rates are not low, the economy seems to be able to handle it.
But if inflation continues to stay elevated, the Fed will have more room to remain hawkish—and even to resume rate hikes.
The market reaction has been very direct.
Yields on the 2-year U.S. Treasuries rose by about 5bp to 4.28%, indicating traders are raising their expectations for near-term policy rates again;
while yields on the 30-year Treasuries instead fell slightly to around 5.19%.
This combination is worth paying attention to.
The market is not really pricing in a scenario of “long-term, broad-based runaway inflation.” Rather, it looks more like:
The Fed may need to push the policy rate even higher in the near term.
So the market narrative has already shifted.
Previously, people were discussing:
When will the Fed start cutting rates?
Now it increasingly sounds like they are asking:
Will the Fed resume rate hikes again this year?
That is not a comfortable environment for risk assets.
If the market continues to raise the probability of more rate hikes, focus on:
Nasdaq / AI tech stocks — the most sensitive to valuation
BTC — liquidity expectations tightening again
2Y U.S. Treasury yields / DXY — to judge how much of Warsh’s message the market has priced in
Gold — whether inflation concerns or real rates end up taking the upper hand
Especially since BTC has just gone through a round of a sharp rebound recently; if short-end yields and the U.S. dollar both continue trending higher, bitcoin is likely to face a very direct liquidity pressure test.
So tonight, I’m not focusing as much on whether Warsh is hawkish.
Instead, it’s this:
Will the market really start trading “the next rate hike” as the Base Case?
If it does, then the K-lines for U.S. stocks and Bitcoin next may not be boring at all.
