Kevin Walsh's first significant blow after taking over as Chairman of the Federal Reserve was not a monetary policy statement but rather a direct surgery on the entire monetary policy mechanism from July 9 to 10, 2026: announcing the establishment of five task forces composed of external experts to conduct a comprehensive review of balance sheet management, policy tool combinations, communication mechanisms, and the impact of artificial intelligence on monetary policy. Unlike the framework assessment in 2020, which was completed internally and ultimately introduced the average inflation targeting, this time the Federal Reserve proactively exposed its decision-making system to external criticism from well-known economists, business leaders, and former central bank officials (including Harvard scholars and former Bank of England Governor Mervyn King). The review scope expanded from "how interest rates are set" to "how the balance sheet is managed," "how policies are communicated," and "how algorithms intervene in judgment," almost touching on all the core nerves of the dollar system. The official statement emphasized the independent operation of the task forces, based on facts, and submitting rigorous analyses to the FOMC; however, the market keenly sensed another layer of meaning: under Walsh's leadership, the Federal Reserve has entered a phase referred to as "reflection and reconstruction," where the path of interest rates, the size of the balance sheet, and communication methods may all be rewritten in the coming years. For assets highly dependent on dollar liquidity and global risk appetite for pricing, this means the macro uncertainty premium is beginning to rise, and the risk premium and volatility structure of BTC, ETH, and broader risk assets will be forced to be repriced in this round of framework review.
External Experts Take Over Evaluation: Is Walsh's Version of the Federal Reserve Acknowledging the Failure of Old Rules?
Unlike the 2020 framework review that was mainly led by an internal team and ultimately resulted in the average inflation targeting regime, this time Walsh directly handed the evaluation power to five task forces composed of external experts. The official statement deliberately emphasized "independent operation and evidence-based," pulling in heavyweight external figures like Harvard scholars and former Bank of England Governor Mervyn King, essentially equipping the old framework with an "external scalpel." For the market, this is not merely a technical review but an acknowledgment by the Federal Reserve using institutional design that the past reactive rules have exposed flaws in the pandemic and post-pandemic environment, requiring a rewriting in balance sheet management, toolbox configuration, communication mechanisms, and even the application of artificial intelligence.
Once the reaction function itself enters a "pending" state, the path of interest rates and the trajectory of the balance sheet turn from predictable policy rules into open-ended questions filled with scenario branches, while the macro volatility premium passively elevates. Dollar liquidity and U.S. interest rate expectations are the anchor for global asset pricing; once this anchor begins to wobble, the strength of the dollar, cross-market arbitrage structures, and global risk appetite will experience larger fluctuations. Historically, BTC and ETH have shown a high correlation and beta with the expectations of U.S. interest rate hikes/ease, and the Federal Reserve's interest rate decisions and significant communication nodes tend to amplify the volatility of risk assets. Now, with the added uncertainty of the framework, each policy signal in the future may trigger renewed speculation about the "new reaction function," forcing the market to reprice macro sensitivity and risk discounts for crypto assets.
Rewriting the Balance Sheet Script: Dollar Liquidity Affects Crypto Market Bull and Bear Cycles
Within the five task forces, "balance sheet management" is the page that determines the direction of the script. In the post-pandemic period, the Federal Reserve's balance sheet was first significantly expanded and then forced to contract rapidly, capturing the entire cycle of global liquidity and high volatility in risk asset prices. Now, Walsh has singled out balance sheet management for external teams to rewrite, indicating that QE/QT is no longer just a technical operation but may be redefined in terms of its pace, scale, and long-term targets. What the market truly cares about is not the number of points in a specific expansion or contraction but whether the Federal Reserve will accept a "super-sized" balance sheet in the coming years, how quickly it will return to a smaller scale, and whether it will establish more rigid automatic contraction/expansion rules, all of which will directly transform into a new anchor for the global dollar liquidity environment.
For the crypto world, the path of the balance sheet is almost a shadow main line. During the expansion phase, the increase in the balance sheet pushed dollars into the global asset balance sheet, passively amplifying the demand and supply of dollar-pegged tokens and lowering the on-chain dollar interest rates, resulting in a decrease in the discount rates of BTC and ETH. Coupled with an improvement in risk appetite, prices naturally entered a high beta upward cycle; during periods of severe contraction, dollars flowed back into the U.S. financial system, raising on-chain funding costs, steepening the yield curve, squeezing the leverage space for decentralized lending and synthetic assets, and shortening and amplifying the crypto leverage cycle. If this balance sheet management review ultimately provides a more rule-based or even more "conservative" balance sheet path expectation, it suggests that the rhythm of dollar liquidity fluctuations in the future may more quickly transmit to the supply of dollar-pegged tokens, DeFi dollar interest rates, and crypto leverage structures. The bull-bear transitions of BTC and ETH will also increasingly rely on each inflection point of this new path.
Toolbox and AI Enhancement: The Uncertainty Premium of the Interest Rate Path
Beyond the balance sheet, Walsh has turned his attention to the "toolbox" and algorithms. The research scope of the five task forces explicitly includes "monetary policy tools" and "the impact of artificial intelligence on monetary policy," which the market interprets as one of the rare systematic discussions at the central bank level about AI's role in the decision-making process. The task forces are currently still in the research and evaluation phase, and the Federal Reserve has not released any signals indicating the adoption of specific AI models or adjustments to decision-making rules; however, the composition of the members—comprising both Harvard scholars and former Bank of England Governor Mervyn King with academic and central banking experience—already hints at a direction: in the future, the path of the federal funds rate may no longer be solely a combination of human committees and traditional macro models.
For the market, once tools and models change, what gets repriced is not the current level of interest rates but the entire distribution of the "path" and "end point." The path of the federal funds rate and terminal rate expectations are already key anchors for global asset pricing, determining the cost of dollar financing and cross-market arbitrage structures. When the market begins to doubt that the Federal Reserve will adjust its decision-making logic under more complex models, or even with partial AI assistance in the future, the probabilities of "misjudgment" and "sudden inflection points" naturally increase in traders' minds, leading to a diffusion of the uncertainty premium. This premium first reflects in the so-called swings of the risk-free yield curve and subsequently transmits to the crypto market through the dollar cost of funds: funding rates, borrowing rates, and futures annualized basis are highly linked to the dollar interest rate environment, and the uncertainty of the interest rate path raises the "insurance premium" for leveraged funds, weakening some high-leverage trend trades while providing thicker profit spaces for cross-term basis trades and volatility strategies. For BTC and ETH, this means that their prices are no longer merely tracking the highs and lows of interest rates; rather, during every reevaluation of the interest rate path expectations, through structural changes in funding rates, leverage costs, and futures basis, they undergo a new round of risk premium repricing and volatility redistribution.
Rebuilding the Communication Mechanism: The Retreat of Forward Guidance and Opportunities for Macro Volatility Trading
The research scope of these five task forces explicitly includes "communication mechanisms," indicating that under Kevin Walsh's leadership in this review, "how to communicate" has been elevated to the same level as "what tools to use" and "how to manage the balance sheet." In contrast, one of the important outcomes of the 2020 framework review was that while introducing the average inflation targeting, it also updated the forward guidance and communication wording to anchor interest rate path expectations with relatively clear commitments. Now, by singling out the communication mechanism as an independent area of research, it itself reveals a reflection: overly rigid forward commitments have incurred significant costs amid the severe volatility of the pandemic and post-pandemic period, and it is more likely to return to a "data-dependent + range descriptive" model in the future rather than providing the market with a single path where answers can be anticipated in advance.
On a concrete trading level, this shift from "locking in paths" to "real-time corrections," if implemented as a new communication framework, will directly elevate the event risk of every FOMC meeting and significant speeches. Market analysis has interpreted this review as a systematic reflection on existing communication strategies; until any new wording is established, expectations themselves will be looser, and prices can only be repeatedly calibrated around each meeting statement and speech. Historically, before and after Federal Reserve interest decision days and major policy communication nodes, the trading volume and volatility of BTC and ETH often rise in phases, demonstrating that macro communication can act like a "secondary amplifier" to translate subtle adjustments in interest rate expectations into significant price fluctuations for crypto assets. If future communications provide less definitive paths and emphasize ranges and conditions, the short-term correlations and implied volatility of BTC and ETH during these windows are likely to be further amplified, and event-driven trading strategies surrounding statement wording will gain thicker profit margins, making the reconstruction of the communication mechanism itself a new key variable in pricing the macro volatility premium for BTC and ETH.
From Policy Reconstruction to Trading Layout: Three Main Lines for the Crypto Market
From a time perspective, this round of external review driven by Walsh currently remains at the starting point of "framing and researching": the five task forces have no public timeline or binding reports, and the Federal Reserve has only committed to submitting "rigorous analysis results" to the FOMC without guaranteeing the automatic adoption of any proposal, and in the short term, there will be no direct adjustment to the interest rate dot plot or balance sheet size. However, due to the absence of details, the tail scenario at both ends of the future policy path—higher interest rates for longer, more aggressive on-balance sheet contractions or re-expansions—will be repriced by the market, with changes in the volatility premium for crypto assets likely occurring before any specific terms are established. Going forward, crypto traders should strategically position themselves around three main lines: firstly, signals from balance sheet management direction, which directly point to global dollar liquidity, anchoring BTC and ETH's risk premiums across cycles and their correlation structures with other risk assets; secondly, potential rewrites of decision "reaction functions" brought by the tools and AI research groups, with more frequent and data-driven policy responses compressing macro uncertainty into a few key data days and interest decision windows, raising market-wide volatility and on-chain leverage costs during these nodes; thirdly, the reconstruction of the communication mechanism will alter how interest meeting and official speeches impact the implied volatility surface, prompting BTC and ETH to experience more pronounced volatility mismatches and repricing of correlations across different maturities. In this "policy reconstruction cycle," the crypto market is more likely to reflect macro changes through the elevation and skew of implied volatility in options, phase reorganization of correlations with U.S. Treasuries and the dollar index, and distortions in funding term structures and leverage costs, rather than betting on a one-way trend during a single meeting. For crypto traders, the focus should not be on a single direction but rather on how these structural variables will be repriced under the new framework.
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