Bitcoin’s rally from under $65,000 to over $81,000 faced its first major macro setback after Fed Chair Kevin Warsh delivered a hawkish message at Jackson Hole on Friday. The bigger question now is whether potentially higher rates and rising Treasury yields can derail the impressive market recovery.

Although BTC remained relatively stable during the speech, it dumped by $3,000 in hours after its conclusion, slipping below $77,000 for the first time in almost a week. The sell-off extended to essentially all other financial markets, including stocks, precious metals, and other risk-sensitive assets.

So, What Really Happened?

Warsh didn’t say directly that the Fed is seriously contemplating hiking the rates, but he didn’t have to. His message was quite clear: inflation remains too high, the US economy is still strong, and the Federal Reserve cannot simply declare victory. Its preferred PCE inflation gauge currently stands at 3.7% YoY, while its six-month annualized rate is even higher at 4.1%. Both remain far above the central bank’s target.

He emphasized that the Fed’s 2% inflation objective is “firm and fixed” and argued that price stability won’t simply restore itself without additional actions from the central bank.

He also dismissed some of the most promising inflation readings this summer, including the June numbers, saying they had not convinced him and his colleagues that the underlying trend had improved significantly. Until the Fed reassures that inflation is moving toward 2% “clearly and at sufficient speed,” policymakers will continue to “have work to do,” he added.

Rate-Hike Odds Rise, BTC Drops

Traders had assigned a one-third probability to a rate increase in September before the speech, but these odds jumped toward 60% after its conclusion, according to market pricing cited by Reuters. US Treasury yields climbed again, while the dollar strengthened sharply after its decline last week.

That’s essentially the exact opposite of the macro environment that helped BTC explode higher 10 days ago. Perhaps that’s why the asset went from a then-peak of over $80,000 to under $77,000 in a few hours, dragging most altcoins with it.

Warsh also pointed to business investments growing at roughly 9% per year, the S&P 500 surging by 20%, while unemployment remained at around 4% and credit conditions were relatively easy. In other words, the economy isn’t currently giving the central bank an obvious reason to tolerate elevated inflation.

In general, higher expected policy rates push Treasury yields upward, which increases the return investors can obtain from the assets that are considered much safer. A more hawkish Fed also tends to support the dollar and tighten broader financial conditions. History shows that such an environment is not ideal for BTC and more speculative altcoins.

Treasury and Fed

Treasury Secretary Scott Bessent’s recent bond-market intervention, which contributed to BTC’s major rally, helped push long-term yields lower, at least in the short term. However, Warsh reminded investors that the Fed’s mandate is quite different.

The Treasury might want to reduce borrowing costs and improve market liquidity, but the country’s central bank still has to deal with inflation running above its target.

This means that markets are still split between two powerful forces: Treasury support for financial conditions and a Fed that may need to keep monetary policy tighter than investors expected.

Source: CryptoPotato