Is the interest rate staying high? Powell's hawkish remarks shake up the crypto market

The Federal Reserve Chair Jerome Powell recently delivered a hawkish signal in his public remarks, directly reversing the market’s optimistic outlook on rate cuts within the year. Powell emphasized that the pace of inflation decline is still insufficient to justify a policy shift, the labor market remains tight, and the Fed needs more evidence to confirm a trend toward price stability. This statement caused the federal funds futures market to rapidly reprice: traders now expect that the policy rate will remain unchanged for most of 2026, with the first rate cut significantly delayed until 2027. Compared to the previous market consensus of “two rate cuts in the second half of the year,” the current rate expectations curve has shifted upward and flattened overall, marking the return of the higher-for-longer narrative.



## What is the market’s pricing logic for unchanged rates in 2026?

Forecast market data and interest rate futures show that traders believe there is over a 65% chance that the Fed will keep the current rate range unchanged before July 2026, while the probability of more than one rate cut throughout the year has fallen below 30%. This pricing logic is mainly based on three facts: core inflation has remained above the Fed’s target range for three consecutive months, consumer spending remains resilient, and financial conditions are broadly accommodative. The market no longer believes the Fed will preemptively act based on economic slowdown forecasts, instead accepting that the policy path will be driven by data verification one by one. Notably, although the median of the dot plot still leaves some room for slight rate cuts within 2026, traders are betting with real money on a longer period of stability.

## How does the 5% U.S. Treasury yield alter the relative attractiveness of crypto assets?

When the risk-free rate remains steadily around 5%, the opportunity cost of holding non-yielding assets like cryptocurrencies is significantly elevated. As of May 18, 2026, data from Gate.io shows Bitcoin priced at $77,300 USD and Ethereum at $2,150 USD, with the overall market still oscillating under macro pressure. From an asset allocation perspective, a 5% yield on U.S. Treasuries means the certainty equivalent return foregone by holding Bitcoin for a year is quite substantial. Institutional investors, when allocating assets, will naturally increase their weighting toward yield-generating assets and reduce exposure to volatile, non-cash-flow-producing crypto assets. This logic already began to manifest in Q4 2025, and the expectation of unchanged rates in 2026 will further entrench this trend.

## What is the opportunity cost of holding non-yielding assets?

Opportunity cost is not only reflected in absolute return comparisons but also in the risk-adjusted return differences across assets. Currently, the real yield on 10-year U.S. Treasuries (inflation-adjusted) is about 2.1%, while Bitcoin’s annualized volatility remains above 45%. This means holding Bitcoin entails bearing much higher price volatility than Treasuries without additional interest compensation. For liability-driven institutions like pension funds and insurance companies, this risk-return profile is unattractive under the current rate environment. Even crypto-native hedge funds are beginning to adopt more conservative net long strategies rather than simply holding spot. The pricing of unchanged rates in 2026 essentially signals to the market: the opportunity cost of holding non-yielding assets will not decrease anytime soon.

## What are the characteristics of current capital flows in the crypto market?

Observing trading data from the Gate platform, since May 2026, the market structure exhibits several typical features. Spot trading volume has fallen about 28% below Q1 averages, perpetual contract funding rates have remained near zero for an extended period, indicating weak leverage demand. The total market cap of stablecoins has slowed significantly, with on-chain transfer speeds of USDT and USDC dropping to lows not seen in the past 12 months. More notably, the negative correlation between Bitcoin and U.S. Treasury yields has re-strengthened over the past two months, with a correlation coefficient reaching -0.53, returning to a typical pattern during rate hike cycles. These data collectively point to a conclusion: capital is shifting from risk-on to defensive allocations, and the market lacks incremental liquidity to push prices through.

## How does the prolonged maintenance of interest rates affect the crypto industry’s financing environment?

The macro interest rate environment also exerts pressure on the primary market and project financing within crypto. In Q1 2026, total crypto venture capital funding was about $1.4 billion, down 22% from the same period in 2025, with the average deal size shrinking. When the risk-free rate stays at 5%, the expected return thresholds demanded by risk capital for early-stage crypto projects naturally rise. Investors will scrutinize project cash flow pathways, tokenomics sustainability, and whether revenues can cover operational costs more strictly. Projects relying on narratives of “future rate cuts flooding liquidity” to justify valuations will face a tougher fundraising environment. Conversely, protocols capable of generating real on-chain fee revenue—such as certain DeFi platforms and Layer 2 solutions—are relatively more favored by capital.

## What are the divergences among traders’ expectations for rate cuts in 2027?

Although the current market consensus centers on unchanged rates in 2026, there are significant disagreements regarding the policy path in 2027. Some traders believe that if economic data in the second half of 2026 shows more pronounced slowdown signals, the Fed might initiate preemptive rate cuts in early 2027. Others argue that the neutral interest rate may have structurally shifted upward, meaning that even if rate cuts occur, the terminal rate will remain above pre-pandemic levels. Data from CME Group shows that interest rate futures expiring in March 2027 imply about 35 basis points of rate cuts, but this pricing has fluctuated repeatedly over the past month. The core of the disagreement lies in variables such as the sustainability of the U.S. fiscal deficit expansion, whether labor productivity growth can contain inflation, and changes in global capital flows—all of which are currently highly uncertain.

## What does the shift in macro narrative toward “higher for longer” imply for crypto valuation logic?

The macro narrative shift from “rate cuts imminent” to “higher for longer” poses a fundamental challenge to crypto asset valuation. Over the past two years, Bitcoin has been viewed by some market participants as “digital gold” and an inflation hedge, but the current environment indicates its pricing is increasingly driven by global liquidity and real interest rates. When real rates are positive and stable, Bitcoin’s safe-haven attributes lack the yield support, and its valuation tends to revert to a pure demand-and-scarcity game. This means that the internal drivers of the crypto market—such as halving supply shocks, institutional adoption progress, and evolving regulatory frameworks—will become more critical in determining price direction than macro factors. The market is undergoing a paradigm shift from “macro narrative-driven” to “fundamental-driven” valuation.

## Frequently Asked Questions (FAQ)

Q: Will the Fed really not cut rates at all in 2026?

A: Traders expect rates to remain mostly unchanged in 2026, but absolute certainty is not guaranteed. Current futures pricing shows less than a 30% chance of more than one rate cut throughout the year. The actual policy will depend on the evolution of inflation, employment, and economic growth data, not solely on market expectations.

Q: Is a 5% U.S. Treasury yield necessarily bearish for crypto markets?

A: From an opportunity cost perspective, a 5% risk-free rate does reduce the relative appeal of non-yielding assets. However, this does not automatically mean crypto markets will decline. If significant technological breakthroughs, regulatory clarity, or mass adoption occur within the crypto ecosystem, internal drivers can offset macro pressures.

Q: Does slowing stablecoin demand indicate capital is leaving crypto markets?

A: The slowdown in stablecoin growth indeed reflects reduced new inflows, but existing on-chain funds are still circulating. Some capital may shift from trading to DeFi yield strategies or wait for clearer macro signals. This is more of a cautious stance rather than a systemic withdrawal.

Q: How should Bitcoin be viewed as an allocation in the current rate environment?

A: Bitcoin’s allocation value is more about its scarcity, decentralization, and low correlation with major global assets. In a high-rate, stable environment, Bitcoin is better regarded as a long-term hedge in a portfolio rather than a short-term trading instrument, with position sizes calibrated to individual risk tolerance.

Q: Which macro indicators are most important for crypto market participants to monitor?

A: Key indicators include core PCE inflation data, non-farm payroll reports, changes in the Fed’s dot plot, and the 10-year U.S. Treasury real yield trend. These directly influence the interest rate expectations curve and, consequently, the relative valuation logic of crypto assets.