Abstract: Recently, the market seems to have entered an elusive phase. Blue-chip cryptocurrencies are maintaining high volatility with no clear direction, while the altcoin market has not seen the anticipated broad bull run. Instead, DAT assets or crypto-equities have been dominating traditional financial markets. Prior to this, many voices on social media have characterized this bull run as driven by traditional capital. The author largely agrees with this assessment and notes that this capital has several distinct features compared to previous market cycles. For example, it is highly influenced by macro factors, has lower risk appetite, is relatively concentrated, exhibits weaker wealth spillover effects, and shows less obvious sector rotation. Therefore, as significant changes occur in the macro environment, re-evaluating these changes will help us make correct judgments. Overall, the author believes that with Powell adjusting the Fed’s decision-making logic, the performance of the U.S. labor market will determine market confidence in a September rate cut in the short term, thereby affecting the prices of risk assets.

What Has Powell’s Speech Changed?

As we know, over the past few months, the core point of contention in the macro economy has been whether the Fed under Powell’s leadership would significantly cut rates within the year, as desired by the Trump administration. So, why is the Trump administration so eager to pressure the Fed into cutting rates, even at the risk of undermining the Fed’s independence and the credibility of the dollar by using administrative power to influence its decisions? In previous articles, we have analyzed the Trump administration’s adjustment goal of "reshoring manufacturing" in U.S. economic policy. However, this goal has encountered two obstacles in practice:

1. Excessively high internal costs, making it unable to compete with international rivals;

2. High government debt, leaving insufficient budget to incentivize reshoring.

Looking at the Trump administration’s first half-year in office, its policies can be broadly divided into two steps. First, upon taking office, it sought to fulfill campaign promises as much as possible to strengthen its authority, such as granting significant power to DOGE and shifting cryptocurrency policies. After consolidating its base, the Trump administration began implementing tariff policies. The reason for pushing tariffs after consolidating support is that raising tariffs could cause market concerns about imported inflation, thereby increasing internal resistance. After gaining strong authority, through months of negotiations, Trump’s tariff policy framework has been preliminarily established and has yielded results. According to U.S. Treasury Secretary Besant, as of August 22, tariffs have brought nearly $100 billion in fiscal surplus over the past six months, with an expected $300 billion by the end of the year. Additionally, investment promises from many countries have been secured, such as $550 billion from Japan, $600 billion from the EU, and a $750 billion energy order.

It can be said that while internal costs (e.g., labor and logistics costs) cannot be reduced immediately—as these require a market reset akin to a Great Depression to recalibrate factor costs—the Trump administration has, through tariffs, somewhat altered the domestic market competition structure and capital structure. Thus, the timing is ripe to pave the way for the next step: Fed rate cuts.

So, what can rate cuts change? There are two main points. First, they can alleviate debt pressure. As we know, during the tenure of the previous Treasury Secretary, Yellen, the U.S. Treasury’s debt issuance structure had already increased the share of short-term bonds. Besant has retained this decision. The benefit is that short-term bond rates are influenced by the Fed, reducing the drag of long-term bonds on fiscal policy. Moreover, current market demand for short-term U.S. bonds is strong, which helps lower financing costs. However, the downside is that it shortens debt duration, increasing short-term repayment pressure. This is why recent negotiations on the debt ceiling have become more prominent. Rate cuts would mean lower interest payment pressure from short-term bonds. Second, rate cuts would reduce financing costs for small and medium-sized enterprises (SMEs), aiding the establishment of industrial chains. Compared to large enterprises, SMEs typically rely more on bank debt financing for liquidity. Thus, in a high-interest environment, SMEs’ willingness to expand financing would be dampened. After altering the domestic market competition structure through tariffs, it is urgent to incentivize SMEs’ production expansion and help them quickly fill commodity supply gaps in the market to avoid inflation. Therefore, the Trump administration will spare no effort to pressure the Fed into cutting rates at this stage, and this is not merely a smokescreen.

Whether it is actively intervening in the renovation of the Fed’s headquarters or relentlessly attacking far-left, progressive, and hawkish Governor Cook, these actions prove the Trump administration’s aggressive push. These efforts seem to have been validated by Powell’s speech at the Jackson Hole symposium last week. The most surprising aspect of the speech was that Powell, who has always defended the Fed’s independence, seemed to yield to Trump’s strong pressure. Several key points in his speech illustrate this shift:

1. It is clear that the risks in the U.S. economy have shifted from inflation to the labor market;

2. The impact of tariffs on inflation will take time to manifest and is not a factor driving spiraling inflation;

3. An update to the monetary policy framework, notably reducing the emphasis on the effective lower bound as a "feature of normal economic conditions."

In plain terms, this means the Fed is no longer overly concerned about inflation triggered by tariffs but is instead worried about a labor market collapse due to economic recession. At the same time, the level of rate cuts can be seen as having no lower bound. Here, the description of the effective lower bound is worth elaborating on. The effective lower bound refers to the point at which further cuts in short-term policy rates by the central bank using conventional monetary tools will have no additional impact on the economy. This shift aligns with the core of Trump’s policies, creating a "two-way convergence" that has sparked market expectations for further liquidity easing.

Impact on the Cryptocurrency Market

The cryptocurrency market is often seen as a canary in the coal mine for global risk asset speculation. Thus, after Powell’s speech, cryptocurrencies rallied across the board. However, the subsequent pullback indicates that the market had already priced in a rate cut within the year to some extent. After establishing a new trading logic, the market shifted from initial emotional expectations to rational expectations, meaning sufficient evidence is still needed to assess the extent of rate cuts.

As for how deep the pullback will be, I believe the trend of ETH, which has been the hottest topic recently, is worth watching. The author believes that as long as the price does not break below this upward channel in the short term, it indicates that investor sentiment has not significantly reversed, and risks remain controllable. In the coming week, labor market-related indicators will significantly impact cryptocurrency trends, especially next Friday’s non-farm payroll data, which will bring considerable volatility. If the employment data falls short of expectations, the probability of a September rate cut will greatly increase. If it exceeds expectations, it will demonstrate the resilience of the U.S. labor market, easing pressure for rate cuts, and the market may pull back further. Regardless, the recent policy-driven market reminds the author of the 2023行情 dominated by CPI.