Countdown to Walsh taking the helm at the Fed! Could "2 fatal reasons" cause US stocks and Bitcoin to crash again?

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Author: Fenrir, Crypto City Fed welcomes a hawkish new leader, market expectations for rate cuts completely shattered The U.S. Senate recently voted 54 to 45 to officially confirm Kevin Warsh as the new Chair of the Federal Reserve (Fed), with his inauguration scheduled for this Friday. This personnel change means that the current Chair, Jerome Powell, will step down from the position (though he will remain as a Governor), marking the beginning of a brand-new Warsh era at the Fed. Upon taking office, Warsh must immediately face a highly challenging monetary policy environment. Although U.S. President Donald Trump has repeatedly pressured the Fed to lower borrowing costs in the past, the latest quotes in financial markets indicate that the probability of rapid monetary easing has become minimal. According to Reuters, multiple market data points show that investors are significantly downgrading their expectations for rate cuts in 2026. Data from the prediction market Kalshi shows that the probability of a rate cut before 2027 has plummeted from 96% in February of this year to 38.2%. Meanwhile, the CME FedWatch tool also indicates that the market estimates the probability of the Fed keeping interest rates unchanged in June and July to be as high as 97.6% and 97.9%, respectively. Economists generally believe that given the current high inflationary pressure and geopolitical uncertainties, it is unlikely that Warsh will comply with Trump's demands to implement aggressive rate cuts. War triggers inflation alarm, economists expect high interest rates to persist until year-end According to the latest survey conducted by Reuters among 101 economists between May 14 and May 19, most experts expect the Fed to freeze the current benchmark interest rate in the 3.50% to 3.75% range, and this stability is expected to last at least until the end of the third quarter. This data represents a significant structural shift compared to last month's survey. In last month's survey, more than two-thirds of experts predicted at least one rate cut this year, but in the latest survey, the number of experts holding this optimistic view has dropped to less than half. Nearly half of the respondents even stated bluntly that the Fed would not take any rate cut action before 2026. The core reason for this dramatic shift in market expectations lies in the inflationary pressure triggered by the surge in international energy prices following the conflict between the U.S. and Iran. Data shows that the Fed's preferred inflation gauge, the core Personal Consumption Expenditures (PCE) price index, has reached a year-on-year growth rate of 3.5%, hitting a new high since May 2023 and far exceeding the official 2% target. Although 86% of economists believe that this wave of energy inflation caused by the war is only a temporary phenomenon, this is the third consecutive month that experts have raised their inflation expectations, with the PCE index not expected to slow to 3.4% until the end of the year. At the same time, the U.S. 10-year Treasury yield has broken through the 4.6% level, climbing to its highest level in the past year. Historical curse looms, cryptocurrency and stock markets brace for liquidity tightening As the market consensus on "higher for longer" interest rates solidifies, the cryptocurrency market, led by Bitcoin, and traditional stock markets are both facing the test of tightening liquidity. For the cryptocurrency market, a loose, low-interest-rate environment brings cheap capital and massive liquidity inflows, providing room for speculative trading and blockchain innovation projects. Once the high-interest-rate environment is prolonged, U.S. dollar liquidity will remain in a state of contraction, and the financing costs for speculative leverage will become unbearable, leading to a retreat in retail participation, making it even harder for tokens relying solely on hype to survive. Historically, every time the Fed welcomes a new Chair, the crypto market and U.S. stocks often experience a period of severe pain: - After Janet Yellen took over the Fed in 2014, Bitcoin subsequently recorded a staggering 84.68% decline; - When Powell handled Fed affairs in 2018, Bitcoin also fell by 73.5%, and the S&P 500 (SPX) saw a 20% correction that year; - When Powell was reappointed in 2022, Bitcoin plunged another 61.35%, and the S&P 500 fell by 24%. Now that Warsh, who has a more hawkish policy stance, has taken over, the market fears that the speed of asset price corrections could be even faster. Financial disclosure sparks integrity storm, regulatory test looms as financial bill deadline approaches Beyond the test of interest

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