Waller sends a hawkish signal; rate-hike expectations surge in July: How is the market pricing interest-rate risk?

Federal Reserve Governor Christopher Waller sent the clearest hawkish signal to date in a speech on July 13. He warned that if the core inflation data to be released this week again run hot, the Federal Open Market Committee will need to consider tightening monetary policy soon. Waller said plainly: “No matter how you measure it, inflation has been moving higher this year, and I’m concerned about the trend in core inflation being too high.”

The reason this remark triggered a sharp market reaction lies in its clear triggering conditions and time window. Waller was not making a vague comment about inflation risks; he directly tied policy action to the upcoming CPI data. He also pointed out that the Federal Reserve’s favorite inflation gauge—core personal consumption expenditures (PCE), excluding food and energy—had reached a 3.4% year-over-year increase as of May, and it has been rising since January, having started to climb before the outbreak of the U.S.-Iran conflict.

Waller further cited policy mistakes from the pandemic inflation period in 2021 to 2022 as a precedent, warning that back then the FOMC faced widespread criticism for failing to raise rates in a timely manner, and that such errors cannot be repeated. This historical reference significantly increased the policy weight of his remarks—markets interpreted it as the Fed seriously considering rate hikes, rather than limiting itself to verbal warnings.

How quickly will market expectations for rate hikes be repriced?

After Waller’s remarks, market pricing shifted rapidly. According to the CME’s FedWatch tool, as of July 13 the probability of a 25-basis-point rate hike at the July 29 meeting had risen to 46.5%, up sharply from 34% the previous day. By July 14, CME data showed the probability of holding the rate steady in July was 58.3%, while the cumulative probability of a 25-basis-point hike was 41.7%. Meanwhile, the market’s probability of cumulative rate hikes twice before year-end (50 basis points) rose to 56%.

The speed and magnitude of this shift are noteworthy. Just a few days earlier, the probability of a July hike was still under 10%. In addition to Waller’s hawkish comments, the abrupt turn was also amplified by a geopolitical overlay. After a new round of military clashes broke out between Iran and the U.S., Brent crude saw a single-day peak rise of 9.9%. The sharp rebound in energy prices directly strengthened the market’s view that inflation pressure will be hard to fade, aligning with Waller’s hawkish signal.

U.S. Treasury yields reacted just as sharply. The two-year Treasury yield, the most sensitive to Fed policy, rose by as much as 8 basis points to 4.29% at one point, the highest level since February 2025; the benchmark 10-year Treasury yield rose by 6 basis points to as high as 4.62%, the highest since May. The entire risk-free rate yield curve is shifting upward—one of the most critical macro variables in crypto asset pricing models.

How is the pricing logic for crypto assets being reshaped by the macro rate cycle?

The pricing logic for crypto assets—especially Bitcoin—has become deeply coupled with the macro interest-rate cycle in recent years. Understanding this connection requires two layers.

First, the risk-free rate is the anchor for discounting risk assets. The federal funds rate determines the baseline level of global risk-free returns. When the Fed keeps rates low, the opportunity cost of capital is lower, making investors more inclined to allocate capital to high-risk, high-return asset classes—benefiting crypto assets. By contrast, when rates rise, yields on safe assets such as Treasuries increase, pulling capital out of speculative assets. A rise in the two-year Treasury yield to 4.29% means risk-free assets can already offer quite attractive returns, placing direct pressure on crypto asset valuations that rely on risk premium support.

Second, market expectations matter more than actual policy actions. Historical experience in crypto markets shows that price turning points often come before the Fed’s real policy moves. Markets start repricing during the expectation phase, rather than waiting until rate hikes are actually implemented. The current market pricing for cumulative rate hikes of 39 basis points over the year implies investors have already been discounting how tightening could play out across several possible FOMC meetings—whether all these hikes ultimately materialize or not.

What规律 does Bitcoin’s performance in historical rate-hike cycles reveal?

Looking back at the Fed’s interest-rate cycles over the past decade, there are notable patterns linking Bitcoin price action to policy turning points.

Rule 1: Bitcoin bull-market tops often lead the start of, or the acceleration in, rate hikes. The market trades tightening expectations early, rather than waiting for policy to actually take effect. In late 2017, when Bitcoin first touched a peak near $20,000, the Fed was in a rate-hiking cycle—price highs did not occur at the lowest interest rates, but at the moment when the market formed a consensus expectation for the tightening path.

Rule 2: Bitcoin bear-market bottoms usually appear in the later stage of hikes, during pauses in hiking, or before the start of a rate-cut cycle. After the Fed entered another rate-hike cycle in March 2022, Bitcoin fell from the high point to around $16,000 early in the cycle, then rebounded to around $71,000 when easing expectations emerged. This suggests the bottom often forms at times when the market is most pessimistic or when policy expectations are about to turn.

Rule 3: Every sudden surge in expectations for rate hikes creates significant short-term pressure on crypto asset prices. After Waller’s remarks, Bitcoin fell more than 2% over the past 24 hours, dropping to around $62,380. Major tokens like Ethereum and XRP also recorded similar drawdowns. This short-term reaction is highly consistent with historical patterns—when the market suddenly realizes that rate hikes are no longer a “low-probability scenario,” risk assets come under pressure first.

Why do inflation data and the Fed chair’s testimony form a double policy catalyst?

This week’s market focus centers on two key events: the U.S. June CPI data and Federal Reserve Chair Kevin Warsh’s testimony before Congress. Together, they complete the final policy puzzle before the July 29 FOMC meeting.

On the CPI data front, markets expect the year-over-year overall CPI increase in June to slow from May’s 4.2% to 3.8%, and core CPI’s annual rate to edge down from May’s 2.9% to 2.8%. However, this marginal improvement may not be enough to convince the Fed that inflation is continuously returning to its 2% target. Waller himself has already said that after inflation stayed hot in the first half of this year, “I need to see several consecutive months of cooling data to confirm that inflation is moving in the right direction.” This means a single month’s improvement is unlikely to change his policy stance.

Warsh’s testimony before Congress is another key variable. This is Warsh’s first time attending congressional hearings in his capacity as Fed chair. The market will closely watch what he says on inflation prospects, the interest-rate path, and forward guidance. Ian Lyngen, U.S. rates strategy director at BMO Capital Markets, said: “Investors continue to focus on the July 29 FOMC meeting, viewing it as a potential timing window for Warsh’s first rate hike. The combination of Tuesday’s CPI data and Warsh’s testimony will significantly change the probability of a rate hike in one direction.”

What risk transmission channels does the crypto market face in the current macro environment?

Based on the current macro interest-rate backdrop, the crypto market faces at least three clear risk transmission channels:

Channel 1: Liquidity squeeze. Rate hikes push up the U.S. dollar and raise borrowing costs. Higher rates mean Treasuries and other safe assets offer higher returns, pulling capital out of speculative assets. A stronger dollar also makes dollar-denominated crypto assets more expensive for international buyers. This liquidity squeeze effect was clearly reflected in the rate-hike cycle in 2022.

Channel 2: Systemic downgrading of risk appetite. When risk-free rates rise, the valuation midpoint of the entire risk-asset complex faces a systemic downward shift. Crypto assets, as one of the most volatile asset classes, often bear the largest sell-off pressure during periods of risk appetite contraction. Current panic sentiment has already shown through—around $62,500, Bitcoin is moving sideways with low trading volume, and both bulls and bears lack clear conviction.

Channel 3: An uncertainty premium tied to inflation expectations and the policy path. Today’s inflation drivers are no longer limited to traditional tariffs and energy prices. The demand spillover from large-scale construction of AI infrastructure has also been explicitly identified by Waller as a new source of inflation. The emergence of this new kind of inflation driver further reduces predictability of the policy path, meaning the market needs to price greater uncertainty.

How should crypto investors interpret the strategic implications of rising rate-hike expectations?

From a broader macro perspective, the current uptick in rate-hike expectations is not an isolated event, but a signal that the macro interest-rate cycle is undergoing a structural shift.

First, the Fed’s policy focus is shifting back from “growth first” to “inflation first.” The June FOMC minutes show that half of the 18 officials expect at least a 25-basis-point hike at some point this year. Rate-hike options are moving from a fringe discussion topic to the center of policy debate. This means that even if there is no hike in July, the risk of hiking has already risen systematically.

Second, inflation’s stickiness is beyond earlier expectations. Core PCE rose from about 3.0% at end-2025 to 3.4% in May 2026. The latest consumer survey from the New York Fed shows that June’s one-year inflation expectations among U.S. households rose to 3.7%, the highest since September 2023. Inflation expectations rising themselves can become self-fulfilling, further compressing the Fed’s policy space to keep rates unchanged.

Third, the crypto market needs to reexamine the narrative that “rates can only go down.” From 2025 to early 2026, markets widely expected the Fed to enter a rate-cut channel, and that expectation was an important macro logic supporting valuation expansion in crypto assets. But current data and comments are challenging this narrative—if inflation remains sticky, rates may not only fail to fall, but could even move higher further.

Summary

The Fed governor Waller’s hawkish remarks pushed market expectations for a July rate hike to 41.7%, and raised the probability of two rate hikes before year-end to 56%. This shift is driven by persistently elevated core inflation, energy prices boosted by geopolitical developments, and new inflation pressures stemming from AI infrastructure. For the crypto market, the upward shift of the risk-free rate curve means that both the discount rate for risk assets and the cost of capital rise in tandem; the liquidity squeeze effect together with lower risk appetite creates dual pressure. Historical experience suggests that crypto asset price turning points often precede the Fed’s actual policy actions—markets are already discounting tightening expectations ahead of time. This week’s CPI data and the Fed chair’s testimony will be key variables for judging the direction of the July FOMC meeting, and important catalysts for short-term pricing in the crypto market.

FAQ

Q: What is the current probability of the Fed hiking rates in July?

Based on the CME FedWatch tool, as of July 14, 2026, the market expects a 25-basis-point rate hike at the Fed’s July 29 meeting with a probability of 41.7%, and a probability of 58.3% for holding rates unchanged. The market’s probability of two cumulative rate hikes (50 basis points) before year-end has risen to 56%.

Q: Why did Waller’s hawkish remarks impact the market so strongly?

There are three reasons. First, he directly linked policy action to the upcoming CPI data, setting clear trigger conditions. Second, he explicitly cited the policy mistake from 2021 to 2022 of hiking too slowly as a warning. Third, he pointed to new inflation drivers such as AI infrastructure demand, broadening the market’s understanding of inflation sources.

Q: What is the mechanism by which rising rate-hike expectations affect crypto asset prices?

The main transmission mechanisms include: an increase in the risk-free rate raising the discount rate for risk assets and weighing on valuations; higher yields on safe assets such as Treasuries pulling liquidity out of speculative assets; a stronger dollar making dollar-denominated crypto assets more expensive for international buyers; and a systematic downgrading of market risk appetite.

Q: Which events this week will determine the direction of rate-hike expectations?

Two key events: U.S. June CPI data (the market expects overall CPI year-over-year to fall to 3.8% and core CPI to tick down to 2.8%); and Fed chair Warsh’s first congressional appearance as chair in a testimony setting. Both will jointly influence the policy direction of the July 29 FOMC meeting.

Q: If there is no rate hike in July, will the crypto market rebound?

Some analysts believe that if the Fed holds rates unchanged, Bitcoin could rebound to above $70,000 because the market will begin pricing a policy path with fewer restrictions. However, even if there is no hike in July, as long as inflation data continues to run hot, the risk of rate hikes remains and the market may struggle to fully dismiss concerns about tightening.