Policy signals after Powell's speech and outlook for the fourth quarter market

Abstract

Federal Reserve Chairman Jerome Powell emphasized that after the 25 basis points rate cut in September, U.S. monetary policy remains in a delicate balance: on one hand, inflation has fallen close to target but still faces stickiness risks; on the other hand, job growth has slowed, and the fatigue in the labor market is gradually becoming apparent. This "two-way risk" leaves room for the Fed's future rate cut path, but it emphasizes that it will not be blindly aggressive. At the macro level, the U.S. economy shows resilience, with GDP growth and consumption still supportive; however, the combination of fiscal deficits and debt pressure, along with a strengthening dollar, keeps financial markets cautious. In the past week, the crypto market experienced severe volatility. A liquidation event on Monday led to over $1 billion in leveraged long positions being liquidated, with BTC prices quickly dropping from above $115,000 to around $112,000, and ETH briefly falling below $4,100. SOL and altcoins also generally declined. According to Coinglass, the total liquidation across the network reached $1.7 billion within 24 hours, setting a new high for the year. The funding rate in the derivatives market has returned to neutral, and skew indicates strong demand for put options, while ETF capital flows show divergence. Whales have significantly cashed out in the ETH market, further exacerbating the downward pressure on the market. Overall, this round of volatility reflects the crypto market's high sensitivity to macro liquidity and derivatives leverage. The rate cut has not supported the crypto market in the short term, as the market has preemptively priced in the positive news and entered a "good news fully priced in" adjustment period. In the future, if U.S. Treasury yields remain high and the dollar continues to strengthen, short-term pressure will still exist; however, if ETF capital flows recover and the derivatives structure improves, the fourth quarter "up October" and year-end market still have opportunities for a rebound.

I. Current Macroeconomic Overview

In a recent speech, Powell further emphasized that the Federal Reserve's stance remains tight even after interest rate cuts, believing that the current interest rate level "remains slightly above neutral." This means that even though accommodative measures have been taken, the overall financial environment still has the effect of restraining inflation. He specifically mentioned that there is "room for further adjustments" in policy, but it will not be predetermined; rather, actions will be taken flexibly based on future employment and inflation data. This statement reinforced the market's understanding of "gradual easing," weakened expectations of excessive easing, and also left room for maneuvering in the fourth-quarter market.

Previously, the Federal Reserve decided to cut interest rates by 25 basis points at the September meeting, marking a significant shift in monetary policy since the beginning of this tightening cycle. The market had already formed high expectations for this move, but Chairman Powell conveyed a message in his subsequent speech that was more complex than a simple rate cut. He repeatedly emphasized the existence of "two-way risks" during his speech: on one hand, if the signs of weakness in the labor market continue to deepen, the Federal Reserve will need to further ease to prevent the unemployment rate from rising too quickly and undermining the long-term growth potential of the economy; on the other hand, if inflation shows signs of recurrence after approaching the target, the monetary authorities also need to remain vigilant to avoid excessive easing that could lead to a rise in price levels again. Powell acknowledged that even after the rate cut, the Federal Reserve is still "in a favorable position," which means that policymakers hope to retain flexibility and are reluctant to let the market bet prematurely on a rapid unilateral path of easing.

The background for interest rate cuts lies in the multiple pressures faced by the U.S. economy over the past year. On one hand, consumer spending and employment performance have gradually slowed down, particularly the growth rate of new jobs in the labor market, which is significantly lower than the high levels of the previous two years, reflecting a decline in companies' willingness to hire. On the other hand, although the inflation rate has significantly retreated from the peak in 2022, core inflation indicators still show resilience. In August, the Personal Consumption Expenditures (PCE) price index rose by 2.7% year-on-year, up from 2.3% in July, indicating that the sticky pressures driven by the service sector and wages have not completely dissipated. In this context, the Federal Reserve's interest rate cut is not a traditional "market rescue" but rather a strategic maneuver: by slightly signaling easing, it aims to avoid excessive tightening of financial conditions that could lead to a second shock to the labor market, while also reminding the market that the policy path still depends on subsequent data rather than a definitive shift. Powell particularly emphasized the term "two-way risks," which reflects the concentrated uncertainty of the current macro environment. The so-called "two-way risks" mean that in the operation of monetary policy, it is necessary to prevent rising unemployment caused by an economic downturn while also preventing inflation from repeatedly undermining price stability. This framework requires decision-makers to maintain a high dependence on data, making the policy path more gradual and flexible. In other words, the Federal Reserve's goal is to maintain a "defensive balance": not allowing the economy to fall too quickly into recession while also avoiding undermining the inflation target. This line of thinking differs from the unilateral tendency of the "forward guidance" policy in the past few years post-pandemic, resembling a more pragmatic stance that emphasizes adaptability.

In terms of employment, recent data indeed indicate that the labor market is gradually cooling down. Employment growth has been below the long-term trend for several consecutive months, and indicators of job vacancies and labor participation rates have both declined, suggesting that the supply-demand relationship in the job market is returning from a previously "overheated" state to a level that is close to balance, or even slightly weak. Powell acknowledged in his speech that the slowdown in employment growth implies that there may be upward pressure on the unemployment rate in the future, and if this trend worsens, monetary policy must provide greater support. Meanwhile, wage growth remains at a relatively high level, which creates some inertia in service sector inflation. Therefore, the policy stance is in a delicate position: it must prevent excessive contraction on the demand side while also controlling risks of cost-push inflation. This situation explains Powell's emphasis on a "slight easing tendency," rather than a significant shift. From an inflation perspective, the overall price level in the U.S. has significantly declined over the past two years, but core service inflation remains resilient, especially in sectors such as housing, healthcare, and education, which display lagging effects. Powell acknowledged that there is uncertainty regarding the improvement of the inflation path, and short-term data fluctuations cannot be viewed as a turning point for long-term trends. This means that even though interest rates have been lowered, the Federal Reserve will remain cautious in the coming months and will not immediately enter a rapid rate-cutting cycle, but will instead rely on data to gradually release space. In other words, the rate cuts are more of an "insurance-style" adjustment rather than a strong pessimistic statement about the economy. In terms of growth, the U.S. economy has shown some resilience this year. The GDP growth rate in the second quarter remained around 2.5%, which, although lower than the highs of the past two years, is still above the potential growth level. Consumer spending remains the main driver, with households benefiting from income growth and some release of savings, sustaining a certain level of purchasing power. However, corporate investment is slowing down, and the manufacturing purchasing managers' index is hovering around the line of expansion and contraction, indicating that the effects of weak global demand and tightening financial conditions are gradually becoming apparent. On the fiscal side, the U.S. federal government's deficit level remains high, with the debt-to-GDP ratio continuously climbing, and limited fiscal space means that there will be more reliance on monetary policy to maintain economic stability in the future. In this context, the cautious tone in Powell's speech becomes particularly important: the Federal Reserve needs to avoid the overlap of its own policies with fiscal vulnerabilities, which could lead to market instability.

From a global macro perspective, the U.S. interest rate cuts are not isolated events but are closely related to the trends in the global economy. European economies have recently been troubled by energy shocks and a decline in industrial competitiveness, with growth in the eurozone continuing to be weak. Inflation has gradually receded but remains high, and the European Central Bank faces a dilemma in its policies. In China, economic growth maintains a moderate recovery under policy stimulus, but the recovery in consumption and investment is still uneven, and the real estate market remains under pressure. Emerging markets are under strain in an environment of a strong dollar and high interest rates, with increased risks of capital outflows and currency depreciation. Therefore, any adjustments by the Federal Reserve not only affect the U.S. domestic economy but also exert strong spillover effects on external economies through the dollar and global financial conditions.

The trends of the US dollar and US Treasury yields have been particularly crucial recently. After the interest rate cut in September, the yield on the US 10-year Treasury briefly fell to around 4%, but after the market reabsorbed policy signals, it hovered around 4.1%, indicating that long-term rates are still constrained by both supply-demand dynamics and inflation expectations. The US dollar index has strengthened in the new week, reflecting that global capital still favors US dollar assets as a safe-haven allocation. This combination has a cascading effect on global financial markets: on one hand, the downward movement of US Treasury yields is limited, meaning financing conditions remain tight; on the other hand, a stronger dollar puts pressure on emerging markets, increasing external uncertainties. For the crypto market, this macro environment suggests that it will be difficult to gain unilateral liquidity support in the short term, relying more on internal market leverage and adjustments in capital flows.

The linkage between macroeconomic and financial conditions is central to interpreting the current situation. The financial conditions index shows that although the Federal Reserve has begun to cut interest rates, the level of interest rates remains relatively high, and the easing of overall conditions is limited by credit spreads and stock market valuations. Marginal improvements in liquidity are more achieved through an increase in market sentiment and risk appetite rather than a substantial decrease in costs. This pattern suggests a certain misalignment between macro policies and financial markets: policies signal easing, but the market may not be able to immediately translate this into an actual easing financing environment. Additionally, the long-term existence of fiscal deficits and geopolitical risks keeps financial markets cautious in interpreting Federal Reserve policies. This is also the reason Powell's speech emphasizes "flexibility"; he needs to manage both inflation expectations and market expectations simultaneously to avoid volatility caused by one-sided bets.

Overall, the policy logic released by Powell's speech can be summarized in three points: First, rate cuts are a forward-looking response to a weak labor market and economic downside risks, but the scale is limited, intended to provide "insurance" rather than full-scale easing; Second, achieving the inflation target will take time, and the Federal Reserve is reluctant to prematurely abandon tightening results due to short-term data fluctuations; Third, global financial conditions are complex and changeable, and the trends of the dollar and U.S. Treasury bonds determine whether policy effects can be transmitted to the market. On a macroeconomic level, the U.S. still demonstrates relative resilience, but slowing growth, fiscal pressure, and external environmental uncertainties require policymakers to maintain balance. The divergence among major global economies further increases spillover effects, making every move by the Federal Reserve affect global markets. In the coming one to two quarters, the interplay between macro and financial conditions will become a key external variable influencing the trends in the cryptocurrency market.

II. Cryptocurrency Market and Macroeconomic Outlook

In the past week, the most prominent feature of the cryptocurrency market has been the concentrated liquidation of leverage and the rapid release of risk. In the previous weeks, driven by the optimistic sentiment about the Federal Reserve's upcoming interest rate cuts, the prices of Bitcoin and Ethereum continued to rise, leading to a rapid accumulation of open interest (OI) in the derivatives market, with high-leverage funds flooding in, creating obvious signs of market euphoria. However, Powell emphasized in his latest speech that the monetary policy path carries "two-way risks," meaning that the pace of future interest rate cuts is not one-sidedly determined and may be constrained by dual pressures of recurring inflation and declining growth. This statement quickly struck down the overly optimistic risk appetite, resulting in a sharp reversal in market sentiment. As a result, the total daily liquidation across the market exceeded $1 billion, especially as ETH leveraged positions faced concentrated liquidations at key support levels, triggering a chain reaction. It is worth noting that this round of liquidation was not merely a one-sided long squeeze; some short funds were also passively exited during the market rebound, highlighting the double-edged sword effect of high leverage characteristics in the derivatives market. While the liquidation of leverage has intensified short-term volatility, it also contributes to a healthy reset of market risk in the medium to long term, building momentum for subsequent trends. Historical experience shows that each liquidation wave often precedes a phase bottom or top, and this time may also lay the groundwork for the next market cycle. According to Coinglass data, on September 22, a total of 406,200 people in the cryptocurrency market were liquidated, with a total liquidation amount reaching $1.678 billion. Of this, long liquidations amounted to $1.595 billion, while short liquidations were $83.4354 million.

In the spot market, Bitcoin briefly fell below a key technical level after the liquidation wave, but did not enter a free-fall. On-chain data shows that whale addresses have displayed significant accumulation signs around the $45,000 line, with long-term funds gradually buying in, creating strong support below and helping the market stabilize quickly. In contrast, Ethereum has shown weaker performance; on one hand, this is due to the higher leverage position in the derivatives market for ETH, which has amplified volatility; on the other hand, the staking ecosystem after the Shanghai upgrade has entered a balanced phase, making ETH more sensitive to macro disturbances. Other mainstream tokens like SOL and TON have maintained investor interest, but their short-term trends still follow the rhythm of BTC and ETH, and have yet to break out into independent markets. Overall, the core logic of the market this week is that a reversal in macro expectations led to leveraged liquidations, followed by long-term funds providing a floor at lower levels, bringing the market into a phase of consolidation.

The microstructure of the derivatives market further reveals the changes in funding sentiment. Before the liquidation wave, funding rates had significantly turned positive, indicating that the optimistic expectations of long leverage had been pushed to high levels; after the liquidation, funding rates quickly fell back, even turning negative at times, showing that excessive optimistic sentiment was suppressed. In terms of basis, the premium of futures relative to spot significantly narrowed after the event, even turning to a discount at one point, indicating a more cautious shift in funding and an increased aversion to medium- to long-term risks. In the options market, the skew indicator shows a significant increase in demand for put options, as investors increase their allocation for downside protection, reflecting a rise in risk-averse sentiment. At the same time, with the large-scale expiration of options, the Gamma effect exacerbated short-term volatility, forcing market makers to dynamically hedge, leading to rapid fluctuations in spot and futures prices. This series of feedback mechanisms in the derivatives market amplified price volatility but also accelerated the clearing process of leverage, creating conditions for sentiment recovery.

ETF capital flows and whale movements have become another major observation point for the market this week. The daily capital inflow of Bitcoin spot ETFs has significantly decreased, with some trading days even showing slight net outflows, indicating that institutional funds are choosing to wait and see against the backdrop of increasing macro uncertainty. However, the cumulative holding size has not significantly decreased, and long-term capital allocation remains stable. On-chain monitoring shows that some large addresses have continued to accumulate in batches during the market's sharp decline, a pattern that is very similar to behavior seen at the end of 2023–2024. The coordinated actions of institutional funds and whales are often a barometer for mid-term trends, and their current commitment and low-level accumulation further reinforce the logic of market consolidation and bottoming. At the structural level, the spot market remains the foundation of pricing, while the leveraged fluctuations of futures and options amplify short-term price movements. This week, leveraged positions have significantly decreased after liquidation, and the decisive influence of spot on price has been re-established. This change indicates that the market is returning to a healthier structural state. In the coming weeks, the market may be in a dynamic equilibrium pattern of "leverage clearing - spot supporting - institutional waiting," making it difficult to see a unilateral trend in the short term, but building momentum for the mid-term trend.

The macro environment is key to influencing medium- to long-term trends. The expectation of interest rate cuts by the Federal Reserve was an important logic driving the rise of crypto assets, as low interest rates mean lower funding costs and increased liquidity, which is beneficial for high-risk assets. However, Powell's speech clearly reminded the market that interest rate cuts are not a one-way process; monetary policy may adjust at any time due to inflation or growth trajectories. This signal caused the dollar index to stabilize after the speech, and long-term interest rates did not significantly decline, thus weakening the market's excessive optimism about liquidity easing. In this context, the funding flow logic in the crypto market has been disrupted, leading to significant short-term pressure. Historically, the crypto market's sensitivity to dollar liquidity and interest rate environments is much higher than that of traditional risk assets, as it lacks stable cash flow and valuation anchors, relying almost entirely on external capital flows. The swings in interest rate cut expectations will therefore become a dominant variable for future market trends. Inflation factors also have a dual impact on the crypto market. If inflation retreats, the market's expectations for interest rate declines strengthen, risk appetite increases, favoring the valuation expansion of crypto assets; however, if inflation fluctuates, investors worry about prolonged high interest rates, leading to a decrease in risk appetite, with funds flowing back to safe-haven assets like dollars and bonds. Currently, while overall US inflation has retreated, stickiness in service and housing-related inflation still exists, compounded by global energy price fluctuations, making the market's confidence in "complete control of inflation" insufficient. This uncertainty makes it difficult for the crypto market to form a lasting one-sided trend, and investor sentiment swings repeatedly. At a deeper level, the fundamental characteristic of the crypto market is its high beta and sensitivity to liquidity. Unlike traditional stock markets, the crypto market lacks a cash flow discount valuation system; its prices are mainly determined by capital flows. The net inflow scale of ETFs, the buying and selling behavior of whales, and changes in derivative leverage positions are indicators at the capital level that often explain market movements better than narratives or fundamentals. In the current context, the uncertainty of interest rate cut expectations and fluctuating inflation further amplifies the market's dependence on capital flows. As long as there is no substantial improvement in dollar liquidity, it will be difficult for the crypto market to break out of an independent trend. However, this liquidity dependence also means that once a positive turning point in the macro environment appears, funds may flow back at a faster pace, and the crypto market will welcome a new round of rapid rising cycles. For this reason, the market appears fragile in the short term but still possesses explosive potential in the long term.

Overall, the logic of the cryptocurrency market this week can be summarized at three levels. On the short-term level, leveraged liquidations and reversals in policy expectations have brought about severe volatility, but spot funds and whale accumulation have prevented a systemic decline. On the medium-term level, a slowdown in ETF inflows and macroeconomic uncertainty have kept funds in a wait-and-see mode, leading the market into a consolidation phase. On the long-term level, the cryptocurrency market still heavily relies on global liquidity and interest rate environments. Once the interest rate cut cycle becomes clearer or inflationary pressures ease, funds are expected to flow back quickly, driving a new bull market. In the coming weeks, the market's key lies in three variables: first, the actual trajectory of the Federal Reserve's policy path and U.S. dollar liquidity; second, the rhythm of re-entry of institutional funds such as ETFs; third, whether on-chain whales and long-term funds continue to accumulate. In this process, investors must be wary of risks brought about by short-term leveraged volatility while also paying attention to the intersection of macroeconomic factors and fund flows, as these are the core forces determining the trend of the cryptocurrency market.

3. Opportunities and Challenges

Entering the fourth quarter, the global macro and crypto market landscape will continue to intertwine and evolve. The Federal Reserve has taken the first step towards interest rate cuts, but the policy path remains full of uncertainty, with subtle changes in inflation and employment data influencing the tightness of monetary conditions. Meanwhile, the strong dollar and high U.S. Treasury yields keep the global risk asset environment cautious. For the crypto market, this means that there are both new opportunities and structural challenges lurking. Investors need to lay out their strategies along both macro and micro lines, seizing the positive factors of capital flows and application expansion while hedging against potential external volatility and endogenous market vulnerabilities. In terms of opportunities, first, the logic of ETF expansion continues. Over the past year, Bitcoin and Ethereum spot ETFs have been successively approved in the U.S. and European markets, gradually becoming the core channel for institutional investors to enter the crypto market. Although there are fluctuations in short-term capital flows, the role of ETFs as a medium- to long-term capital accommodation is gradually becoming evident. Once the Federal Reserve's policy path becomes clearer and risk aversion weakens, the continuous net inflow into ETFs will provide solid support for BTC and ETH. Historical experience shows that sustained inflows of ETF funds can not only improve market liquidity but also reshape the investor structure, reducing the market's reliance on leveraged funds, thereby promoting a healthier mid-term trend. Second, institutional entry remains a long-term engine driving industry development. As the policy and compliance environment gradually clarifies, more and more traditional financial institutions are exploring the allocation of crypto assets and blockchain-related products. From asset management companies to insurance funds, and corporate treasuries to family offices, the scope of institutional demand is continuously expanding. Especially against the backdrop of high valuations in the U.S. stock market and fluctuations in bond yields, crypto assets are increasingly seen as an important part of portfolio diversification. If the macro environment stabilizes in the fourth quarter, the accelerated entry of institutional funds may become an unexpected boon for the market. Third, the deepening of blockchain applications provides fundamental support for the market. In the past two years, decentralized finance (DeFi), on-chain derivatives, stablecoins, and the tokenization of real-world assets (RWA) have rapidly developed, not only enhancing on-chain capital efficiency but also gradually intersecting with traditional financial markets. In particular, the growth of RWAs makes blockchain an important platform for liquidity and financial innovation. With the Federal Reserve's interest rate cuts opening expectations for global liquidity easing, capital may seek arbitrage opportunities between traditional markets and on-chain markets, thereby injecting vitality into the crypto ecosystem. In the fourth quarter, alongside technological upgrades and the launch of new applications, the market will have more narratives supporting price rebounds.

However, the challenges cannot be ignored either. First is macroeconomic uncertainty. Although the Federal Reserve has started to cut interest rates, the future path remains uncertain. If inflation shows volatility before the end of the year, or if the labor market deteriorates again, the Fed may adjust its pace, and the volatility of the US dollar and US Treasuries will become a persistent risk source for the market. Global geopolitical uncertainty, pressure from fiscal deficits, and uneven liquidity distribution may also exacerbate market volatility in the short term. In this macro environment, the crypto market, as a high-beta asset, often becomes the primary victim during capital adjustments. Secondly, regulatory risks still loom over the industry. The US SEC continues to maintain a high-pressure stance on token issuance, stablecoin compliance, and exchange regulation, aside from ETFs. Although the European MiCA regulatory framework provides a clearer path, compliance costs will increase for some projects, squeezing profit margins. In emerging markets where regulation is ambiguous, capital flows may also experience fluctuations. This means the crypto market needs to find a balance between expansion and compliance; otherwise, short-term benefits may be offset by policy disturbances. Furthermore, whale behavior and the fragility of market structure will continue to be sources of short-term market disruptions. A recent large-scale cash-out by ETH whales is a typical example. Due to limited market depth, the capital operations of a single entity can significantly influence prices, creating "emotional resonance." When the market structure remains highly reliant on leverage and derivatives, whale behavior amplifies volatility, undermining investor confidence. Only when ETFs and institutional funds gradually dominate can the market slowly detach from this dependency. Therefore, the crypto market in the fourth quarter is characterized by a coexistence of "opportunities and challenges." On one hand, ETFs and institutional funds provide long-term support, while the deepening of blockchain applications brings structural growth momentum; on the other hand, macroeconomic environment and regulatory uncertainties, along with whale operations and leverage dependency, may trigger volatility in the short term. Investors need to switch strategies across different time scales: focusing on risk control and liquidity observation in the short term, while paying attention to improvements in capital structure and value reassessment brought about by application expansion in the medium to long term.

4. Conclusion

Overall, Powell's speech and the Federal Reserve's interest rate cuts represent a new stage in macro policy: the policy is no longer unilateral, but has entered a gradual balance under the "two-way risk" framework. The U.S. economy still shows resilience, but fiscal pressure and persistent inflation prevent the market from fully relaxing. On a global level, the trends of the dollar and U.S. Treasuries determine the funding environment for risk assets, while the crypto market, as a high-volatility asset, will still move with the winds under this macro backdrop in the short term. The clearing events of the past week have revealed the dual risks of leverage dependence and market structural fragility, but at the same time, it has released some pressure from the market, cleared excessive leverage, and created conditions for a healthier rise in the future.

The market outlook for the fourth quarter can be summarized in two key words: volatility and turning point. Volatility arises from macro uncertainties and adjustments in internal funding structures, while the turning point lies in the continuity of ETF capital flows, the gradual entry of institutional funds, and the long-term value brought by blockchain applications. Historical data shows that October is often a strong month for the crypto market; if the macro environment does not present significant headwinds, the market could very well restart a rebound after clearing. What investors need to do is not to predict every short-term fluctuation, but to establish a flexible and robust framework: remain vigilant in the interweaving of macro and crypto, and decisively strike at the nodes of liquidity and structural improvement. The pattern of opportunities and challenges coexisting is precisely the norm of the crypto market and the source of long-term investment value.