Bitcoin Decouples From Fed Policy? Walsh Ends Forward Guidance Before Supply Halt; September Rate Hike Probability Drops Sharply to 65%

The Fed's policy paradigm is undergoing a fundamental restructuring. On July 1 local time, at the European Central Bank's annual central bank forum in Sintra, Portugal, Fed Chair Kevin Warsh explicitly announced that the Federal Reserve will no longer provide interest rate forward guidance, instead relying entirely on the latest economic data to make decisions at each meeting. This statement marks the most profound change in the Fed's policy communication system that has been gradually built since the 2008 financial crisis.

The market quickly reacted to this signal. According to CME FedWatch tool data, as of July 2, the probability of the Fed keeping rates unchanged in September is 36.1%, the probability of a cumulative 25 basis point hike is 49.8%, and the probability of a cumulative 50 basis point hike is 14.1%. Just before Warsh's speech, market pricing for a September rate hike had exceeded 60%. Within a week, the probability of a September rate hike fell from a psychological high of around 80% to below 65%—this sharp fluctuation itself is the perfect footnote to the shift in market pricing logic after the disappearance of forward guidance.

The change in policy communication is reshaping the pricing logic of risk assets. What does this mean for the crypto market?

Why the Fed Chose to Halt Forward Guidance

At the forum, Warsh stated bluntly that forward guidance is “not the right policy tool for the current economic situation.” He explained that at the press conference after the last FOMC meeting, he had already made it clear that forward guidance “is not suitable for the current policy environment.” The Fed is “cutting a new path” and will no longer hint at the direction of interest rates in advance as it has in the past.

The logic behind this decision is not complicated. Warsh believes that policymakers should engage in thorough discussions at each FOMC meeting based on the latest data, rather than pre-releasing policy signals to the market. “We will have our next meeting in four weeks, and I hope that by then everyone can engage in a real family-style debate,” he said at the forum.

Warsh also noted that U.S. inflation risks have decreased over the past four weeks. The U.S. May CPI year-on-year rate reached 4.2%, still far above the Fed’s 2% policy target, but in recent weeks, market inflation expectations and risks have shown signs of cooling. Against the backdrop of unclear inflation trends, committing to a rate path in advance could instead constrain policy flexibility.

Additionally, Warsh and ECB President Christine Lagarde are highly aligned in their stance of downplaying forward guidance. Lagarde said at the forum that she feels “bound and forced” by forward guidance and prefers “framework guidance”—where the central bank explains how it makes policy decisions without implying a predetermined rate path. The consensus among major global central banks on this issue provides external endorsement for the Fed's policy shift.

Why the September Rate Hike Probability Plummeted from a High

The probability changes shown by the CME FedWatch tool clearly illustrate how the market digested Warsh's speech.

As of June 30, the market probability of a 25 basis point rate hike in September was 48.8%, and the probability of a 50 basis point hike was 14.1%. The combined probability of at least one rate hike in September exceeded 60%. This probability structure itself was an important market signal—investors were not only pricing in “whether a rate hike will occur,” but also “how strong the rate hike might be.”

However, by July 2, the probability distribution had shifted significantly: the probability of maintaining the rate in September was 36.1%, the probability of a 25 basis point hike was 49.8%, and the probability of a 50 basis point hike was 14.1%. The overall downward movement in rate hike probabilities reflects the market’s recalibration of expectations for the policy path after losing the “anchor” of forward guidance.

The drivers of this change are multiple. First, Warsh explicitly refused to hint at the direction of interest rates at the end of July, leaving the market unable to extract incremental information from central bank officials’ statements. Second, his emphasis that inflation risks have declined somewhat eased market concerns that the Fed might be forced into aggressive rate hikes. Third, Warsh’s discussion of AI’s potential to expand the economy’s supply capacity provided theoretical support for the narrative that “inflation can fall without rate hikes.”

More notably, the June FOMC dot plot already showed that 9 of the 18 officials who submitted forecasts expect at least one rate hike in 2026. This means there is significant divergence within the Fed on rate hikes, and by refusing to provide forward guidance, Warsh has effectively shifted the policy suspense from “what the Fed says” to “what the data says.”

How Warsh’s “Data Dependency” Model Works

The core of Warsh’s policy framework can be summarized as: Use real-time data to replace forward guidance, and use action credibility to replace signal guidance.

At the operational level, this model means that each Fed rate decision will be based on the latest economic data available before the FOMC meeting. Actual economic indicators such as inflation, employment, economic growth, and energy prices will replace preemptive policy hints from central bank officials and become the primary basis for market judgments on the direction of interest rates.

Warsh is pushing for deeper institutional changes. He revealed that the Fed has established five internal special working groups covering communication mechanisms, the balance sheet, data usage, productivity and employment, and the inflation framework. These working groups will include Fed officials and external international experts, aiming to reassess the policy framework and communication mechanisms. Among them, one working group will focus on data, and another will study how officials measure inflation and respond to it.

Warsh also set an ambitious timeline for the Fed, targeting “discovery” within one year and beginning to rely on high-quality data that can reflect economic conditions in real time, replacing what he considers problematic government statistical reports.

On the balance sheet issue, Warsh reiterated his desire to shrink it, but emphasized that the pace will not be rushed. He noted that the current balance sheet of approximately $6.7 trillion is far above pre-pandemic levels and took about 18 years to build—“18 weeks is far from enough” to complete the return. The market generally expects that substantive balance sheet reduction will likely not start before 2027.

The New Market Pricing Logic After the Disappearance of Forward Guidance

The exit of forward guidance has structural implications for financial markets.

Under the old communication paradigm, the Fed guided market expectations through dot plots and clear signals, allowing investors to “anticipate” the central bank’s anticipation to some extent. This model reduced market uncertainty but also caused asset prices to partially detach from fundamentals, instead reflecting expectations of central bank behavior to a greater extent.

Warsh’s reform completely reverses this logic. Reducing forward guidance makes short-end rate pricing more dependent on real-time economic data, leading traders to frequently adjust positions around the release of key data points like inflation and employment, increasing volatility. The 2-year Treasury yield has recently experienced significant fluctuations, while the 10-year and 30-year Treasury yields have remained relatively stable, with the yield curve showing a characteristic of “short-end throttle fluctuating, long-end steering steady.”

For risk assets, this means a more complex pricing environment. Having lost the Fed’s forward guidance as a “policy anchor,” asset prices will be more directly exposed to economic data fluctuations. Each release of CPI, PCE, and nonfarm payroll data may trigger a repricing of the rate path.

But this could also bring a positive structural change: Asset prices will reflect economic fundamentals more, rather than over-interpretation of central bank officials' speeches. Warsh’s stance of being data-driven and responding to inflation risks in a timely manner may strengthen the Fed’s credibility as an inflation anchor, thereby compressing term premiums and stabilizing long-term rates.

Positioning of Crypto Assets in the Policy Paradigm Shift

Bitcoin climbed back above $60,000 after Warsh’s speech. As of July 2, BTC was quoted at $60,300 on Gate market data, up about 2.05% in 24 hours. This price action itself is a market signal worth examining.

The logic behind Bitcoin’s rebound is not complicated. Warsh said that U.S. inflation risks have declined over the past four weeks, while reaffirming the Fed’s commitment to returning inflation to the 2% target. This statement eased market concerns about aggressive rate hikes—and the drop in rate hike expectations is generally seen as favorable for zero-yield assets like Bitcoin.

But the deeper logic lies in the policy paradigm shift itself. The exit of forward guidance means the Fed is no longer providing free “policy insurance” to the market. In the past, investors could use the Fed’s forward guidance to hedge policy uncertainty; now, that hedging tool is disappearing. For Bitcoin, this could mean two opposing forces at play:

On one hand, increased policy uncertainty may raise overall market volatility, and a volatile environment is usually conducive to the risk premium expression of alternative assets like Bitcoin.

On the other hand, if Warsh’s data dependency model successfully lowers inflation expectations and stabilizes long-term rates, the risk-adjusted returns of traditional financial assets may improve, thereby diverting some speculative capital that would otherwise flow into crypto assets.

At the forum, Warsh also specifically mentioned the potential macroeconomic impact of AI. He noted that AI model capabilities are growing exponentially, and the supply capacity expansion driven by AI will be a new variable that monetary policy must pay attention to. AI-driven investment may expand the productive capacity of the U.S. economy, with potentially significant implications for future monetary policy. This assessment echoes the crypto industry’s narrative of “AI and blockchain integration” at a macro level—both point to technological change reshaping traditional economic paradigms.

Asset Revaluation in the Context of Rising Market Volatility

Warsh’s policy shift has already triggered visible knock-on effects across multiple asset classes.

In the U.S. stock market, as of the close on July 2, the Dow was down 0.03% at 52,305.24 points, the S&P 500 was down 0.22% at 7,483.23 points, and the Nasdaq was down 0.66% at 26,040.03 points. Technology stocks fell significantly, and chip stocks generally came under pressure. The 2-year Treasury yield, most sensitive to monetary policy, briefly fell to the day’s low after Warsh’s speech, hovering around 4.15%. The dollar index rose 0.25% to 101.39.

Multiple institutions warned that if the Fed formally abandons forward guidance, volatility in the U.S. Treasury market could rise significantly, and term premiums would also increase. The change in the Fed’s policy model is leading the market into a new pricing phase.

For crypto assets, this means a more complex macro environment. Under Warsh’s new framework, the market will have to deal with two levels of uncertainty simultaneously: the uncertainty of economic data itself, and the uncertainty of how the market interprets the Fed’s reading of that data. The combination of the two could amplify short-term fluctuations in asset prices.

But from another perspective, one of the original design intents of Bitcoin and other crypto assets was to provide a non-sovereign, censorship-resistant store of value within the traditional monetary policy system. A reduction in Fed policy transparency could actually strengthen this narrative—when the behavior of central banks becomes increasingly unpredictable, an asset with transparent rules and a fixed supply may have a more prominent value proposition.

Long-Term Impact from “Signal Dependency” to “Data Dependency”

Warsh’s policy shift is not an improvisation but part of a systematic reform.

Since taking office as Fed Chair in May, Warsh has rapidly advanced multiple reforms. The new policy statement released after the June FOMC meeting completely removed references to forward guidance. His statement at the ECB forum is merely a continuation and deepening of this reform path.

Warsh emphasized that the Fed is “cutting a new path.” The core of this new path is a transition from “signal guidance” to “action credibility.” Under the old model, the Fed managed market expectations through forward guidance; under the new model, the Fed builds credibility through each data-based decision.

The long-term impact of this shift may far exceed short-term market fluctuations. If Warsh’s reform succeeds, the Fed will no longer be a “foreteller” but a “responder” —reacting to economic reality rather than trying to shape it through words.

For the crypto market, this means that the main macro narrative is shifting from “what the Fed says” to “what the economic data says.” The relationship between Bitcoin and Fed policy may transform from a direct interest rate-sensitive correlation to a more indirect one transmitted through economic fundamentals and inflation expectations.

Summary

Warsh’s speech on July 1 marks a fundamental turning point in the Fed’s policy communication paradigm. Abandoning interest rate forward guidance and shifting to full data dependency is itself the biggest challenge to the Fed’s policy framework over the past decade. The probability of a September rate hike falling from a high to below 65% is a direct reflection of market repricing in the new information environment.

For crypto assets, this shift is both a challenge and an opportunity. The challenge is that increased policy uncertainty may exacerbate market volatility; the opportunity is that when the behavior of traditional central banks becomes increasingly unpredictable, Bitcoin and other assets with transparent rules and fixed supply may gain new support for their store-of-value narrative.

The future market will no longer revolve around “what the Fed will say next week,” but around “what next week’s data will show.” For crypto investors accustomed to finding trading signals from Fed officials’ speeches, this may be a process requiring relearning. But for long-term investors who believe asset prices will eventually return to fundamentals, this may be a healthier market environment.

FAQ

Q: What is the specific impact of Warsh’s “halt of forward guidance” on the probability of a September rate hike?
A: According to CME FedWatch tool data, as of July 2, the probability of the Fed keeping rates unchanged in September is 36.1%, the probability of a cumulative 25 basis point hike is 49.8%, and the probability of a cumulative 50 basis point hike is 14.1%. Before Warsh’s speech, the market’s pricing for at least one rate hike in September had exceeded 60%. Overall, the probability of a September rate hike has fallen from a high, with expectations for the rate hike path shifting significantly downward.

Q: Why did Bitcoin rebound above $60,000 after Warsh’s speech?
A: Bitcoin’s rebound was mainly driven by two factors. First, Warsh said that U.S. inflation risks have decreased over the past four weeks, easing market concerns about the Fed being forced into aggressive rate hikes. Second, Warsh reaffirmed the Fed’s commitment to restoring inflation to the 2% target, strengthening confidence in price stability. As of July 2, BTC was quoted at $60,300 on Gate market data.

Q: What does the “data dependency” model mean for the crypto market?
A: Under Warsh’s new framework, the Fed’s rate decisions will be entirely based on the latest economic data before each FOMC meeting. This means crypto asset pricing will be more directly exposed to economic data fluctuations, with each release of key data like CPI, PCE, and nonfarm payrolls potentially triggering a repricing of the rate path. At the same time, after losing the Fed’s forward guidance as a “policy anchor,” market volatility may increase.

Q: What impact does Warsh’s reform have on the Fed’s balance sheet?
A: Warsh reiterated his desire to shrink the Fed’s approximately $6.7 trillion balance sheet but emphasized that the pace will not be rushed. He noted that the balance sheet took about 18 years to build, and “18 weeks is far from enough” to complete the return. The market generally expects that substantive balance sheet reduction will likely not start before 2027. Warsh stressed that interest rate policy will remain the Fed’s most important monetary policy tool, rather than relying on balance sheet operations.