Sophia’s Thoughts on Jackson Hole
Jerome Powell’s Jackson Hole speech marked a turning point. He signaled that rate cuts are likely ahead, reshaping markets and setting the stage for crypto’s next move.
These are Sophia's Thoughts:
Powell struck a dovish tone, downplaying tariff-driven inflation and signaling cuts could begin in September, sharply moving the markets and the dollar.
The Fed’s pivot highlights a shift toward labor market concerns, rising odds of a September cut, and a politically charged backdrop that keeps risks alive.
Crypto rallied hard on Powell’s remarks, and while volatility remains, a dovish Fed cycle historically fuels positive price action.
🚀 Last week’s market performance
The crypto market fell 4.0% this week, with Bitcoin (BTC) sliding 5.3% as weakness spread across majors. Qtum (QTUM) was the standout, soaring 48.0% on the launch of its new AI agent. On the downside, Maker (MKR) lagged the field, dropping 13.5% to close the week as the worst performer.
🧐 What is your crypto mood today?
In each Sophia's Thoughts newsletter, we ask about your crypto mood. Your response to this question helps Sophia get a better sense of the pulse of crypto markets. And this ultimately translates into better insights for you when combined with Sophia's AI models. Your data empowers Sophia to provide you with even better intelligence going forward!
🇺🇲 What Happened at Jackson Hole
All eyes were on Fed Chair Jerome Powell at Jackson Hole, and his speech leaned clearly dovish. Powell said, “The stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance.” In Fed language, that was read as confirmation that cuts are coming, and most likely starting in September.
He acknowledged the recent rise in prices from tariffs but downplayed their long-term impact: “The effects on consumer prices are now clearly visible, but our base case is that they will be short-lived. Longer-term inflation expectations remain well anchored.” Translation: inflation risks are real but manageable, and the Fed’s priority has shifted toward supporting a softening labor market.
Powell also rolled back the “average inflation targeting” framework introduced in 2020 during the COVID recovery. That policy let the Fed run inflation above 2% for a time to make up for years when it was below target, a tool meant for a low-inflation world. With inflation now persistently high, that approach has outlived its purpose. By returning to a simple 2% goal, the Fed is signaling a cleaner, more flexible mandate that puts price stability back at the center.
Markets wasted no time reacting. The S&P 500 jumped 1.5% on Friday and the 10-year Treasury yield dipped to 4.26%. But the clearest signal came from the dollar, the DXY slid sharply during Powell’s speech, underscoring just how decisively markets interpreted his remarks as dovish. Gold moved higher in response, while Bitcoin surged past USD 117K and Ethereum tagged USD 4,955 before retracing over the weekend.
💭 Why Jackson Hole Matters
Powell’s Jackson Hole speech wasn’t another policy update, it marked a pivot in how the Fed is weighing its dual mandate. For the first time since the tightening cycle began, the Fed signaled that labor market weakness is now the greater risk, not sticky inflation. As Powell put it, “The balance of risks appears to be shifting.”
That shift matters for three big reasons:
Macro backdrop: By signaling rate cuts as “maintenance” rather than “panic,” the Fed is effectively telling markets it can ease without recession fears. As one JPMorgan note to clients put it, Powell’s tone “confirms a September cut… even a hotter CPI print on Sep 11 seems unlikely to derail optimism surrounding accommodative monetary policy.” That view is now echoed in the data: the CME FedWatch Tool shows an 85.2% probability of a September rate cut, up from just 61.9% a month ago, while prediction market Polymarket prices in an 82% chance.
Politics & credibility: Powell used Jackson Hole to quietly defend the Fed’s independence, even as Trump continues pressuring for faster and deeper cuts. The controversies around Fed Governor Lisa Cook underscored how political the backdrop has become, raising the stakes for Powell’s final months as chair.
Market dynamics: Dovish Powell is historically bullish for risk assets. While September often brings short-term weakness after Jackson Hole rallies, history shows that cuts near all-time highs have been followed by strong performance. In fact, the S&P 500 has been higher one year later 20 out of 20 times when the Fed cut rates within 2% of an ATH, with average gains close to 14%. Add in the three cuts near highs late last year, and we could soon be looking at a perfect 23-for-23 record.
If the Fed cuts in September, it will come after a nine-month pause since the last move in December 2024. History suggests those long waits often set up bullish outcomes as well. In past pauses between 5 and 12 months, stocks were higher a year later in 10 of 11 cases, with median gains of 14.5%.
While seasonal chop in September is a real risk, the broader backdrop favors the bulls. Weakness may come in the near term, but history suggests it rarely lasts when the Fed is easing with markets near their highs.
🔩 Where Crypto Fits in
Powell’s dovish tone lit a spark under crypto, with Bitcoin ripping above USD 117K and Ethereum brushing all time highs in the immediate aftermath of his remarks. The rally was fueled by the same dynamic driving equities higher; rate cuts weaken the dollar, ease financial conditions, and boost the appeal of risk assets. In crypto’s case, it also reinforces the “digital gold” narrative, where BTC benefits directly from expectations of currency debasement.
The gains didn’t hold through the weekend, but the broader message is intact: a Fed pivot is a liquidity tailwind. An 85% probability of a September cut highlights just how firmly markets are pricing in easier conditions. If realized, that liquidity could accelerate flows into BTC, ETH, and crypto-linked ETFs.
Sentiment data tells the same story. Market sentiment remains firmly in the very positive range, showing resilience across the board, while coin-level sentiment has begun to slide modestly, a sign that optimism around individual tokens is cooling even as the broader macro backdrop supports risk assets.
Still, investors should brace for volatility. Powell stressed the Fed will “proceed carefully,” and tariff-driven inflation or weaker jobs data could change the pace of easing. September also carries seasonal risks, historically one of the weaker months for risk assets following Jackson Hole rallies.
Big picture: dovish policy cycles have consistently coincided with crypto bull phases. If the Fed follows through with cuts this fall, crypto could be positioned for another leg higher into Q4.
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