A New Era Begins

The day I’ve been building up over the last few weeks in the Squawks has come and gone.  

Reflecting on the outcomes, many said it was a nothing burger. But to me, it didn’t disappoint.  

From today, economic policy will never be the same. This is the start of a new era. And you know what that means – markets too, will never be the same again.  

But before I get started, here’s the thing.  

It’s never an easy task having to sit here on the keyboard pondering how to make economic policy changes sound sexy. This, though, is one of those rare situations where I reckon the changes could be so impactful, that most people will follow along with interest. Especially if you’re investing in digital assets.  

Okay, so maybe it’s still not going to be sexy. But it matters. 

My hope is that this Squawk distils one of the more landmark moments for markets, both right now and for the years ahead. Think about it: we all want to know when this bear market will be over right? Well, one very real possibility is that it ends if policymakers shift the underlying economic conditions towards easing.  

That’s why I care enough about Big Kev’s opening speech to compare it to Origin Game 2 last week (carn’ QLD). It’s completely fine to hold a view that this market cycle could be different. That this bear market is longer, shorter or the same – but there’ll be reasons behind why it plays out the way it does.  

And perhaps the biggest of those reasons, I believe, will be influenced by this reform of economic policy in the US.  

Let’s dig in.  

Change is coming

If you haven’t been following this story, the term ‘regime change' has been thrown around since day one of new Fed Chair Kevin Warsh taking his seat, which was only a few weeks ago. Thursday, he showed us he is living up to the hype.  

Let’s roll the tape back and give some context. Under previous Chair Jerome Powell, and his predecessors going back to Ben Bernanke, the Fed Chair’s statements had evolved into long, and carefully worded communications. It eventually got to the point where it became normal for the market to fixate on the tone and style of the messaging more than the data sitting underneath it.  

Warsh’s long-held view is that this is backwards – hence the ‘regime change’ narrative. So, he’s put this into play from day one, with the current statement only three paragraphs long and just over 100 words. Three times shorter than the previous release in April.  

And he went further. Warsh also declined to submit his own projection to the ‘dot plot’. This is a grid where each policymaker pencils in where they think rates are heading. He’s long been a sceptic of that tool, and of forward guidance broadly. This is another clear example of Kev following through with his word.  

Forward guidance: Why does it matter?

Forward guidance is the Fed’s way of telling markets, in advance, roughly where it expects key data to land for interest rates ahead. For more than a decade, this guidance has been a blanket that the market has relied on to make decisions. Warsh has long argued that the Fed over-communicates, getting in the way of the market making its own decisions based on data and facts alone. Now we’re seeing him act on it.  

Let’s take a breather.  

Why should digital asset investors care about any of this? 

Because taking away forward guidance quietly changes how the whole market behaves. For more than a decade, investors have leaned on the tone and data behind it, pricing in moves before they ever happened.  

Strip that away, and the market loses its predetermined roadmap. Positioning starts to follow the hard data as it lands, rather than the tone and the clinical overuse of a thesaurus coming out of these meeting statements. 

My take? This could mean markets become more volatile. Potentially sharper reactions to each significant economic data release, because there's simply less handholding from the policymakers above.  

And if that does play out, remember volatility can cut both ways. 

Task forces

If dropping forward guidance wasn’t enough of a mic drop, the discussions of task forces were to me the ‘how’ behind Warsh’s rebuild plans at the Fed.  

He announced five independent groups, each appointed a different pillar of the Fed’s operation. In his words they will be ‘clear-eyed about its mission, fit for purpose, and focused on the future’. Here’s my notes:  

• Communications: reviewing how the Fed talks to markets (including the dot plot and projections we just mentioned). 

• Balance sheet: examining the size and make-up of the Fed’s holdings, and the ‘ample reserves’ system it runs today. 

• Data: rethinking the information the Fed relies on, aiming for more accurate and more timely reads on the economy. 

• Productivity and jobs: studying the impact of new general-purpose technologies, AI very much included, on employment and inflation. 

• Inflation frameworks: going back to first principles on what actually drives inflation and how best to deliver price stability. 

This was the loudest and most intriguing drop of the discussion. While nothing is obvious now, this is laying the foundation for serious change. This isn’t a survey of what could we do better, it’s a call to arms to rework how the Fed operates.  

I remember back during his nomination, Warsh argued that AI could massively boost the economy’s ability to produce things cheaply, which over time brings inflation down. And it’s totally possible, if we see supply in goods or services increase, costs may get driven down.  It’s supply demand economics 101.  

This is a genuinely interesting idea, but it will invite more and more sceptics. AI is already polarising enough – now add the counterpoint that enormous spending on compute could end up adding to inflation. Either way, the Chair is laying the groundwork for massive reform over the next 1–2 years.   

This means what matters to the Fed today, may not look the same in the future. 

2% Goal

For all the talk of change, Warsh was rock-solid on one thing that hasn’t: the 2% inflation target. 

The goal of US policymakers is to create stability. Walk the tightrope of providing economic growth and stimulus, while managing the inflation that may come from these activities. This is what is known as a ‘dual mandate’ in dry econ speak.  

In summary, he’s not interested in conversations about moving the goal posts until the Fed has proven it can consistently hit 2% again. 

And the context here matters. US consumer prices were reported to be rising at a 4.2% annual rate in May, the highest in about three years. The influence of energy costs tied to the rise in oil and disruption to supply chain in the Middle East may be to blame. The Fed also nudged up its own inflation forecast for the end of 2026.  

So, you have a brand-new Chair, with the hottest inflation in years, planting his flag firmly on price stability. This could be a bitter pill for those hoping for rate cuts – especially when half of the committee have pencilled in at least one rate hike for 2026, on the dot plot I mentioned above.  

All this talk of inflation and interest rates leads me to my finale, the bond market. Moving away from statements and news headlines, we can infer what the market thinks of this news.   

Chart of the week: 2s10s are falling after the announcement

So how is the market digesting all this? It’s early days, but a gauge I’ll be watching actively is the US Treasury yield curve. Specifically, the gap between the 2-year and the 10-year yield, which commonly gets dubbed the '2s10s’. 

Bond markets can help tell the story of how the market feels about interest rates and inflation. 

Quick primer. The 2-year yield is very sensitive to where the market thinks the Fed will set rates in the near term. The 10-year is more about the longer-run outlook for growth and inflation. The gap between them, 2s10s, explains this dance between inflation and rates. That’s why it’s top of my list.  

After Warsh spoke, the 2-year yield jumped around 14 to 16 basis points to roughly 4.2%, its highest level in over a year. The 10-year drifted lower, currently hovering near 4.46%.  

Structurally the market is therefore of the belief that rates could rise, and growth/inflation (the two go hand in hand to a degree) will cool down.  

The knock-on effects rippled straight into our world. A more hawkish interpretation of these Fed changes means higher yields and a stronger US dollar, and both of those tend to pull liquidity away from risk assets like crypto. 

None of this is a prediction of what comes next, and past moves are no guide to future ones. But this is the current market structure, based on what we know today.  

Warsh’s debut is a Chair who is comfortable shaking up the institution. This could be good, bad or neutral for digital assets.  

But I’ll leave you with one final thought on what could come next, in a more optimistic light.    

Is this hawkish tone the continuation of a genuine rate-hike cycle, or will other factors – like cooling oil price – do the Fed’s job for it? Energy prices do influence both inflation and productivity (growth) and Brent Crude Oil (BRENT) has fallen to $77 USD at this time of writing. It’s 20% down in two weeks. Maybe there is a positive path forward that doesn’t result in higher interest rates, or growth slowing. That’s what I’ll be looking to understand from here.    

See you next time.