Powell's speech brings double happiness! The Federal Reserve (FED) "tapering" will end the high fluctuation in Bitcoin prices.

Federal Reserve Chairman Powell delivered a significant speech on October 14 at the National Association for Business Economics (NABE) conference in Philadelphia, confirming that the rising employment risks are changing the policy assessment, indicating that there will be two more interest rate cuts this year. More importantly, Powell's remarks revealed that the Federal Reserve may stop tapering in the coming months, as the $6.6 trillion balance sheet contraction is about to come to an end.

The market reacted immediately, the dollar fell, government bond yields decreased, and the price of Bitcoin rose slightly as investors interpreted the policy shift as the beginning of an improvement in the liquidity environment.

Core points of Powell's speech: Policy stance has clearly turned dovish

During a speech in Philadelphia, Powell stated that although the federal government shutdown has prevented the release of official economic data, "the job and inflation outlook does not seem to have changed much since our September meeting," when the Federal Reserve (FED) lowered the benchmark interest rate for the first time this year. Federal Reserve (FED) officials also predicted at that meeting that the Federal Reserve (FED) would lower interest rates two more times this year and once in 2026.

The key point of this statement is the confirmation of the continuity of the interest rate cut path. Michael Feroli, chief U.S. economist at JPMorgan, stated in a report to clients: "Although the likelihood of the Federal Reserve cutting rates at the next meeting is almost beyond doubt, today's comments strongly affirm this expectation." The market widely expects the Federal Reserve to further cut rates by 25 basis points at the next meeting to be held on October 28-29.

Another key message from Powell's speech is regarding the balance sheet. He stated that the Federal Reserve (FED) may soon stop reducing its balance sheet by about $6.6 trillion. Currently, the Federal Reserve (FED) allows about $40 billion of U.S. Treasury and mortgage-backed securities to expire each month without replenishment, and this quantitative tightening (QT) policy continues to withdraw liquidity from the market. Powell pointed out: "We may be approaching this level in the coming months."

The significance of halting the tapering should not be underestimated. While this does not equate to an immediate restart of quantitative easing (QE) and the purchasing of assets, it at least indicates that the pace of liquidity contraction will stop. Over time, this transition may slightly lower borrowing costs and inject more liquidity into the financial markets.

Employment risks become a core consideration of policy

A notable feature of Powell's remarks is the emphasis on the risks to the labor market. He stated, "The rise in downside risks to employment has changed our assessment of the risk balance." This statement reiterates the message he first conveyed after the September meeting, namely that the Federal Reserve's concerns about the labor market are slightly greater than its other mandate from Congress—to maintain price stability.

Specifically, Powell pointed out that the number of hires and job openings has significantly declined, while wage growth has slowed. "There is no path without risks," he stated, emphasizing that the Federal Reserve must maintain flexibility. By adopting a "meeting-by-meeting" policy approach, the Federal Reserve can respond flexibly to fluctuating economic indicators.

This shift in policy stance is crucial for understanding the price trends of Bitcoin. When the Federal Reserve (FED) shifts its policy focus from "fighting inflation" to "supporting employment," it indicates that monetary policy will tend to become more accommodative. Lowering interest rates and stopping balance sheet reduction will increase market liquidity, and an improvement in the liquidity environment is usually beneficial for risk assets. As a high-risk asset class, Bitcoin often benefits from periods of liquidity expansion.

Inflation and Tariffs: A Delicate Balance on a Double-Edged Sword

Powell's remarks on inflation are both encouraging and concerning. Currently, the core Personal Consumption Expenditures (PCE) price index stands at 2.9%, indicating that the economy is moving toward stability. However, he issued a stern warning, emphasizing that despite improvements in the economy, external factors—particularly tensions related to tariffs—threaten the Federal Reserve's vision of maintaining a stable inflation rate of 2%.

Powell clearly pointed out that tariffs have raised the inflation indicator favored by the Federal Reserve (FED) to 2.9%, but aside from tariffs, there is no "broader inflationary pressure" to keep prices elevated. This judgment is crucial—it means that the Federal Reserve (FED) believes the current inflation issue is primarily caused by external shocks (tariffs), rather than economic overheating or excessive demand.

This judgment provides a theoretical basis for the Federal Reserve's interest rate cut policy. If inflation rises mainly due to supply-side shocks (tariffs increasing import costs), rather than overheating on the demand side, then the side effect of stimulating demand through interest rate cuts (which may exacerbate inflation) is relatively controllable. The Federal Reserve can support employment without overly worrying about inflation spiraling out of control.

For the price of Bitcoin, inflation expectations triggered by tariffs may actually be a positive factor. Historical experience shows that when the traditional financial system faces complex challenges, the appeal of Bitcoin as a non-sovereign currency often tends to rise. The inflation expectations caused by the tariff war may drive investors to seek hedging tools, and Bitcoin has increasingly been regarded as "digital gold" by more and more people in recent years.

Market's Immediate Reaction: Cautious Optimism

After Powell's speech, the financial markets experienced a brief surge of optimism. Economists at the Montreal Bank's capital markets estimate that the dollar fell slightly, U.S. treasury yields declined, and stock index futures rose slightly. Traders interpreted Powell's neutral tone as dovish but remain cautious about future trends.

In the cryptocurrency space, well-known assets like Bitcoin and Ethereum have slightly risen, indicating that investors' risk appetite is rekindled. Although the gains are not significant, the shift in direction itself is of great importance. After several weeks of consolidation and volatility, Powell's speech provided a clear policy signal, allowing market participants to allocate funds with greater confidence.

Nevertheless, Powell's cautious stance on the possibility of inflation making a comeback remains concerning. It clearly reminds people that the inherent volatility of today's market is a characteristic, not an exception. Investors need to find a balance between optimism and caution, seizing the opportunities brought by improved liquidity while guarding against geopolitical risks and unforeseen economic shocks.

The far-reaching impact of the liquidity framework

Powell's speech has far-reaching implications, touching on the liquidity framework for managing the digital asset market. As the turbulence of quantitative tightening policies gradually subsides, expectations for more favorable liquidity conditions are sparking excitement. This is crucial for startups operating within the Web3 framework, as their success largely depends on the seamless integration of cryptocurrency and fiat systems.

Specifically, the improvement of the liquidity environment will affect the price of Bitcoin and the cryptocurrency market from several aspects:

First, there is the direct effect of capital inflow. When The Federal Reserve (FED) lowers interest rates and stops tapering, the supply of dollars in the market will increase, and some funds will seek higher return investment opportunities. Cryptocurrencies, as a highly elastic asset class, may attract these funds.

Secondly, there is a reduction in opportunity costs. A low interest rate environment means that the opportunity cost of holding cash and bonds declines, making investors more willing to allocate to risk assets like stocks and cryptocurrencies in pursuit of higher returns. Historical data shows that Bitcoin often performs well during rate-cutting cycles.

Thirdly, there is an improvement in risk appetite. Loose monetary policy typically boosts market confidence and enhances investors' ability to bear risk. This psychological change may impact Bitcoin prices more quickly than actual capital flows.

The fourth is the prosperity of the decentralized finance (DeFi) ecosystem. More abundant liquidity will reduce on-chain borrowing costs, stimulate the activity of DeFi protocols, and in turn promote the development of the entire cryptocurrency ecosystem.

Disruptive Links of Tariffs

The complex interactions between tariffs and inflation add a layer of unpredictability, which profoundly impacts the liquidity and efficiency of cryptocurrency and fiat currency transactions. Research shows that to navigate these turbulent environments effectively, it is essential to establish a complex strategic framework, especially for participants in the decentralized finance space.

Due to the impact of tariffs on pricing and liquidity changes, cryptocurrency startups may need to readjust their strategies to establish closer connections with the existing financial system. As companies compete to withstand external economic pressures to ensure their future development, innovation coexists with necessity. Some DeFi protocols have begun to integrate real-world assets (RWA), attempting to reduce reliance on the price volatility of a single cryptocurrency asset.

Historical Defense and Future Outlook

Powell spent most of his speech defending the Federal Reserve's actions in purchasing long-term government bonds and mortgage-backed securities in 2020 and 2021. These purchase plans were aimed at lowering long-term interest rates and supporting the economy during the pandemic, but faced fierce criticism from Treasury Secretary Scott Basset and some candidates.

"In hindsight, we could have – or perhaps should have – stopped asset purchases earlier," Powell admitted. "Our immediate decisions were aimed at mitigating downside risks." However, he stated that taking action earlier would not have prevented the surge in inflation during the COVID-19 pandemic: "Stopping early might bring about some changes, but it is unlikely to fundamentally alter the economic trajectory."

This kind of self-reflection shows the pragmatic side of Powell. While acknowledging that there is room for improvement in policies, he also emphasizes that the purpose of purchasing bonds is to prevent a collapse of the U.S. Treasury market, which could otherwise lead to a significant rise in interest rates and more severe consequences.

Powell also spoke about the initiative proposed by bipartisan senators to prevent the central bank from paying interest on the cash reserves held at The Federal Reserve (FED) by banks. Last week, a measure to stop the FED from doing so was overwhelmingly defeated in the Senate by a vote of 83 to 14. Powell stated that without the ability to pay interest on reserves, the FED "will lose control over interest rates" and will be unable to fulfill its mission.