Fed policy shift: new framework, interest rate cut suspense, and Powell's tone-setting tonight.

The Fed is shifting from a flexible inflation target to a strict 2% control, prioritizing price stability. Current inflation exceeds the target, and tariffs add uncertainty, reducing the urgency for a rate cut in September. Powell's speech tonight may lean hawkish, emphasizing data dependency, and the crypto market needs to follow changes in liquidity expectations.

1. Fed's New Monetary Policy Framework: Key Shift from 'Flexible' to 'Strict'

For the crypto market, the Fed's monetary policy directly affects global liquidity expectations, and this framework adjustment is a core premise for judging the subsequent funding situation. The core changes of the new framework focus on four dimensions:

1. Inflation Target: Say Goodbye to FAIT, Anchor to a Strict 2% Target

The Flexible Average Inflation Targeting (FAIT) launched in 2020 was originally designed to address the low inflation and low growth environment after 2008 — allowing inflation to moderately exceed 2% to compensate for the previous low inflation phase. However, the surge in inflation after the pandemic in 2022 exposed the limitations of this framework: it directly delayed the Fed's response to inflation in 2021.

Currently, under the pressure of rising prices due to tariffs, the new framework is likely to abandon or downplay FAIT and re-emphasize a "strict 2% inflation target." Powell has clearly stated that "the wording from 2020 has become invalid due to high inflation," which directly implies that the Fed will return to a traditional inflation targeting regime to avoid long-term disanchoring of inflation expectations.

2. Dual Mission: Priority Rise of Price Stability

The framework of 2020 prioritized "broad and inclusive" employment goals, at which time the Fed believed that "a strong labor market would not necessarily lead to inflation," a judgment based on the experience that low unemployment rates before the pandemic did not push prices up.

But recent data has broken this perception: the annual inflation rate reached 2.7% in June 2025 (partly driven by tariffs), with only 73,000 new jobs added in July (the previous value was also revised down), and while the labor market remains robust, signs of cooling are already apparent. Powell has repeatedly emphasized that "price stability is a prerequisite for the employment market to unleash its potential," clearly conveying the signal that "inflation control is a rising priority."

3. Coping with Uncertainty: The "Wait-and-See" Stance under Tariffs

The tariff policy of the Trump administration poses dual risks: it may drive up inflation while also suppressing economic growth, potentially even triggering "stagflation" (high inflation, high unemployment, low growth). Powell pointed out that the impact of tariffs on prices "could either be a one-time increase or evolve into persistent inflation," and the specific effects still need to be observed.

From the minutes of the Fed's July meeting, policymakers generally adopt a cautious attitude towards the impact of tariffs, leaning towards "waiting for more data before taking action." This "wait-and-see" stance will permeate recent policy decisions.

4. Framework Review: Retain 2% Target, Simplify Communication

The Fed is advancing its five-year framework assessment, ensuring that the framework is "robust and effective" under different economic conditions through the "Fed Listens" initiative, research meetings, and FOMC discussions. The final new framework will maintain the 2% inflation target but may simplify the policy tools and communication methods (for example, by adjusting the presentation of the "dot plot").

Tonight's speech by Powell will be a key occasion to elaborate on these changes in detail, and it is expected to emphasize the decision-making logic of "flexibility" and "data-driven".

2. Rate Cut in September under the New Framework: Supporting and Opposing Factors Pulling

The Fed's interest rate cut decision directly affects market liquidity, which is particularly crucial for the funding situation in the crypto market. The possibility of a rate cut in September is being repeatedly pulled by both positive and negative factors:

Three Major Factors Supporting Rate Cuts in September

• Signals of a cooling labor market: In July, new employment increased by only 73,000, and the previous value was revised down. Coupled with an unemployment rate maintained at 4.1% (close to full employment but showing signs of weakness), this indicates some alleviation of pressure in the labor market, providing some space for interest rate cuts.
• Market expectations are strong: According to federal funds futures data, the market currently expects a 0.25% rate cut in September with a probability of 70%-83%, reflecting the market's expectation of "Fed support for employment," which will also put some pressure on policy decisions.
• FOMC internal calls for easing: At the July meeting, members Waller and Bowman have clearly supported interest rate cuts, indicating an internal tendency towards easing. If subsequent data continues to weaken, it may drive more members to support interest rate cuts.

Three Major Resistance Against Interest Rate Cuts in September

• Inflation continues to exceed targets: The annualized inflation rate in June is 2.7%, significantly above the target value of 2%, and tariffs continue to push up prices for certain goods. Powell is concerned about "long-term inflation expectations becoming unanchored" and currently tends to favor maintaining restrictive policies to control inflation.
• The impact of tariffs is unclear: Whether the effect of tariffs on inflation is "one-time" or "persistent" has yet to be determined. If the Fed lowers interest rates too early, it may exacerbate inflationary pressures, hence they tend to wait for clearer impact data.
• The labor market remains robust: Despite weak employment data in July, the unemployment rate at 4.1% is still low, and there has been no "significant deterioration" in the overall labor market, which supports the Fed's decision to "maintain the status quo."

Three, Powell's Speech Preview Tonight: "Data Dependence" Under Hawkish Tone

Powell's speech will directly set the tone for the Fed's short-term policy direction, significantly affecting sentiment in the crypto market. Based on the current signals, his speech is likely to present characteristics of "hawkish but with room for flexibility:"

1. Hawkish stance: Originating from inflation and framework goals

Powell's hawkish stance will mainly revolve around "inflation control": he may reiterate the inflation risks posed by tariffs, as well as the necessity of "anchoring 2% inflation expectations"; at the same time, in conjunction with the new framework of "prioritizing price stability," he will emphasize that the current interest rate level of 4.25%-4.50% is considered "moderately restrictive," suitable for addressing the dual risks of current inflation and the labor market.

Similar statements like "We can wait for clearer data before taking action" and "We can maintain restrictive policies for a longer time" are likely to emerge, indicating that he will not be in a hurry to push for a rate cut in September.

2. The Path of Balance: Not Excluding the Possibility of Rate Cuts

To maintain policy flexibility, Powell will not completely shut the door on a rate cut in September. He may clearly state that if the employment data in August continues to weaken (such as new job additions remaining below 100,000) and the labor market significantly deteriorates, the Fed will "adjust policies in a timely manner to support the economy"—this "data dependence" statement can stabilize market expectations and leave room for subsequent decisions.

Goldman Sachs and Yardeni Research also predict that Powell will maintain a "neutral and cautious" stance, focusing on "not locking in a specific policy path, but rather following changes in the data."

3. Political Background: Upholding Independence

Despite Trump's repeated pressure on the Fed to cut interest rates, Powell is likely to emphasize "the independence of the Fed's policy decisions" in his speech, clearly stating that policy-making will be based on economic data rather than political pressure. This statement serves both to maintain the Fed's credibility and to reinforce the policy's original intent of the "dual mandate (price stability + full employment)."

From a policy perspective, the Fed is currently in a stage of "cautiously hawkish, data-driven": it will neither rashly cut interest rates due to short-term employment weakness nor excessively tighten due to inflation exceeding expectations. The core approach is to find a balance between "monitoring + data verification" to avoid policy errors that could exacerbate economic uncertainty while addressing "controlling inflation" and "stabilizing employment."

For the crypto market, this means that short-term liquidity easing expectations need to cool down: if Powell confirms a hawkish stance tonight, the market's optimistic expectations for a rate cut in September may be adjusted, and the crypto market may face short-term emotional pressure; however, it is still necessary to closely follow subsequent employment and inflation data in the long term - if the data points to "falling inflation + worsening employment," a window for easing may still open; otherwise, it will need to adapt to the Fed's "prolonged restrictive policy."

In short, the current Fed policy has no absolute direction, "data validation" is the only main storyline, and the crypto market also needs to shift from "betting on rate cuts" to "following data to adjust expectations," maintaining a rational response.

The above report data was edited and organized by WolfDAO (x:10xWolfDAO). If you have any questions, please contact us for updates.

Author: WolfDAO