Analysis of Powell's Latest Speech: Shift in Monetary Policy and Market Impact

Key Signals from Powell's Speech

The latest speech by Federal Reserve Chairman Powell conveyed three signals worth noting, which challenge the previously formed optimistic expectations in the market:

1. The interest rate cut process will be more cautious - Although a 25 basis point cut was completed in September, Powell clearly emphasized that "there is no preset direction for future policies," and subsequent decisions will be strictly based on economic data such as employment and inflation. This statement shattered the market's expectations for a "rapid easing cycle," which was a significant driving factor behind the previous rise in the cryptocurrency market.

2. Asset Valuation Risk Reminder - Powell specifically mentioned that "asset prices are high", which the market interprets as an indirect warning for risk assets. Currently, the leverage ratio in the crypto market is at a high level (with Bitcoin's open interest reaching $12 billion), and this warning has led to a rapid withdrawal of leveraged funds, resulting in significant selling pressure.

3. The focus of policy shifts to risk prevention - Powell emphasized that the downside risks in the job market have become the core consideration for policy adjustments. This indicates that the Federal Reserve is currently more concerned with "economic fundamental stability" rather than "asset price performance," leading to a loss of imaginative space for risk assets in terms of policy support.

Policy Stance and Economic Assessment

monetary policy stance

Powell stated that despite the interest rate cut implemented in September, the Federal Reserve's policy stance remains slightly tight, which allows the Federal Reserve to respond more flexibly to economic changes. Importantly, future policy adjustments will be entirely dependent on the latest data, changes in outlook, and risk balance assessments, rather than following a preset path.

Economic Risk Dual Assessment

The current economy faces the dual risks of inflation rebound and a weakening labor market:

• If the policy is relaxed too quickly, it may result in a failure to control inflation.
• If the tightening is maintained for too long, it may lead to unnecessary deterioration in the labor market.

Inflation Situation Analysis

Due to tariff policies, short-term inflation expectations have risen this year, but most long-term inflation expectation indicators still align with the Federal Reserve's 2% target. Powell pointed out that the impact of tariff policies on inflation may be relatively short-lived, with price level changes largely being one-off adjustments, but their effects may persist for several quarters, and the Federal Reserve is closely monitoring their lasting impact.

Labor Market Conditions

The hiring activity and employment growth in the United States have seen a "significant decline," with both labor supply and demand slowing down. The U.S. job market has lost its previous robustness and is showing substantial weakness. Powell attributes this phenomenon to the uncertainty in public policy direction, which has led companies to postpone hiring decisions.

market valuation perspective

During the Q&A session, Powell acknowledged that the current valuation of US stocks is at a high level according to multiple indicators. However, he also stated that it is not currently a "time of rising financial stability risks," and that the banking sector's capital position is good, while the overall financial situation of households is stable.

Market Reaction Analysis

After Powell's speech, the crypto market showed a significant and differentiated reaction:

• Mainstream Coin Performance Divergence - Bitcoin has dropped approximately 1% in the last 24 hours, while Ethereum has seen a decline of over 3%. This difference reflects a shift in capital flow, with around $2 billion moving out of Bitcoin, some of which has flowed into the Ethereum ecosystem.

• Leverage Funds Suffered Impact - Due to the previously strong bullish sentiment in the market, long positions were excessively accumulated. After the speech, the total liquidation amount across the network exceeded $1 billion within 24 hours, with nearly 60% of the liquidations being long positions in Bitcoin. The concentrated exit of short-term speculative funds actually helps to clear the market sentiment more quickly.

• Expected Structural Adjustment - Although the pace of interest rate cuts is expected to slow, the market still assesses the probability of a 25 basis point cut in October at 92%. The current real interest rate has dropped to a low level of 1.1%-1.35%.

Investment Strategy Reference

In light of the current market environment, investors may consider the following strategic framework, adapting it according to their personal risk preferences and investment cycles:

Short-term Risk Control Strategy

• Key Price Range Monitoring: Bitcoin needs to closely monitor the effectiveness of the $111,000 support level, which has both psychological and technical support significance.
• Ethereum Support Range: The range of 4050-4100 USD constitutes a key short-term support range, which is also where several moving averages converge.
• Principles of Capital Management: During the current phase of increased volatility, it is recommended to keep the risk of a single trade within 1-3% of total assets.
• Stop Loss Setting Reference: You can use 1-2% below the recent low points as the stop loss position to avoid being triggered by market fluctuations due to too tight of a stop loss.

Medium-term layout strategy

• Batch Positioning Strategy: Consider using a three-stage layout method of 30%-40%-30% near important support levels.
• Leverage Usage Principle: Given the current high market uncertainty, it is recommended to keep the leverage ratio within 2 times or to completely avoid leverage.
• Asset Allocation Optimization: Consider increasing the cash reserve ratio to prepare for potentially better entry opportunities.
• Hedging Methods: Some mainstream trading platforms offer hedging tools that allow you to establish protective positions with a small amount of capital.

Data Tracking Focus

Investors should pay special attention to the following upcoming economic data, which will directly impact the Federal Reserve's decision in October:

• PCE Inflation Index ( Federal Reserve's preferred measure of inflation )
• Non-farm payroll report ( employment change and unemployment rate )
• The Consumer Confidence Index ( reflects economic expectations )
• ISM Manufacturing and Services Index ( Economic Vitality Index )

Only by continuously monitoring the changes in these fundamental data can we more accurately grasp the direction of policies and market reactions, providing a more solid basis for investment decisions.