Fed meeting is shaping up to be a nightmare for Warsh. Bitcoin might still shine

An aggressive market expectations trap and a strict aversion to forward guidance have backed the Fed chair into a corner, where failing to deliver a hawkish message risks destroying the central bank’s...

The Senate defeat of the Clarity Act has left bitcoin bulls at the mercy of Wednesday’s Federal Reserve meeting, an event that some observers warn could prove highly challenging for the central bank’s chair, Kevin Warsh.

The Federal Reserve is scheduled to announce its interest rate decision at 2:00 PM ET, with Warsh set to hold a press conference 30 minutes later. Ahead of the announcement, bitcoin, the largest cryptocurrency by market value, was trading at $75,800, down nearly 3% over the past 24 hours. The broader digital asset market also faced downward pressure, with tokens including JUP, XLM, and ICP each declining by about 10%.

Financial markets have almost fully priced in a 25-basis-point rate hike, which would lift the federal funds target range to 3.75%-4%, according to the CME’s FedWatch tool. Nearly every major investment bank also expects at least one more rate hike before the end of the year, according to data shared by Wall Street Journal reporter Nick Timiraos.

That mix of hawkish market expectations complicates the landscape for Warsh, according to Robin Brooks, a senior fellow at the Brookings Institution and former chief economist at the Institute of International Finance.

According to Brooks, the primary narrative is not today's anticipated rate hike, but rather the additional policy tightening expected later this year. Warsh may therefore struggle to deliver a message that aligns with the aggressive pricing currently seen in the markets.

“Tomorrow's Fed meeting is a nightmare for Warsh. There's no way he can live up to all the hikes priced, so the press conference will likely disappoint markets. The Dollar is likely to fall and long yields likely to rise,” Brooks said.

A weaker dollar typically supports dollar-denominated assets, including bitcoin and gold, reflecting a well-documented negative correlation between digital assets and the U.S. Dollar Index (DXY). Further, as Brooks noted, longer-duration Treasury yields are likely to rise if the press conference disappoints.

While rising yields are traditionally a bearish signal for non-yielding assets like bitcoin and gold, some observers note that the underlying driver matters. In this instance, yields are expected to climb due to an inflation signal from the Federal Reserve rather than an optimistic economic growth outlook, a crucial distinction that alters the typical market playbook.

According to a JPMorgan scenario analysis shared by Barchart, if the Fed hikes rates without delivering explicit, hawkish forward guidance, investors could conclude that current monetary policy remains too accommodative, prioritizing economic growth over restraining inflation.

In response, market participants might begin pricing in more aggressive tightening in the coming months, potentially via 50-basis-point hikes, lifting yields higher. Notably, Warsh is known for his historical opposition to the use of forward guidance.

A similar risk stems from the view that a less hawkish tone would dent the Fed’s inflation-fighting credibility. Recent inflation readings have underscored sticky price pressures, while global oil benchmarks on both sides of the Atlantic have returned above $100 a barrel. Against this backdrop, a less hawkish central bank may prompt bond investors to demand a higher risk premium to hold Treasury debt, driving yields upward.

In both scenarios, yields are projected to rise for reasons beyond a positive economic growth outlook, meaning they may not penalize non-yielding assets like gold and bitcoin.

In fact, both assets, widely seen as sovereign hedges and stores of value, could ultimately gain after an initial risk-off reaction.

The 10-year Treasury yield is already hovering near 5%, up roughly 80 basis points this year. Crucially, much of that increase has been driven by mounting U.S. debt concerns.

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