Macro-economic developments have serious consequences on cryptocurrency markets. Unlike the expected recession year, we did not see one. The Fed initially claimed inflation was temporary, but it persisted. Now, with inflation remaining strong and the economy weakening, risk markets are preparing for an interesting period.
Fed Interest Rate Comments
The growth of the US gross domestic product (GDP) has significantly slowed down. According to data released by the Commerce Department on Thursday, growth was at 1.6%, which is 50% below expectations. The United States is experiencing its toughest inflationary period in the last 40 years, and although the Fed had labeled inflation “temporary,” a growing number of economists, observers, and ordinary Americans expect it to last for years.
Desmond Lachman, a senior researcher at the American Enterprise Institute and a former official at the International Monetary Fund (IMF), now sees less likelihood of the Fed achieving a soft landing with a 2% inflation target. Instead, Lachman anticipates a new phase characterized by “weak economic growth and inflation remaining above the Fed’s target, leading to stagflation.”
Lachman expects interest rates to be cut in one of the next two meetings.
Cryptocurrencies and the US Economy
BTC dropped to $63,831 following the latest PCE data release. This is not surprising as the data, slightly higher than previous figures, showed no easing in inflation. The Commerce Department’s PCE price index, which includes all items including food and energy, rose by 2.7% compared to the 2.6% forecast. The monthly increase remained steady at 0.3%.
FedWatch data indicates that the market has increased its optimism about interest rate cuts this year. George Mateyo, chief investment officer at Key Wealth, stated;
“Today’s inflation reports were not as hot as feared, but investors should not overly cling to the idea that inflation has fully recovered and that the Fed will lower interest rates soon. The possibility of a rate cut continues, but it is not certain, and the Fed will need to see weakness in the labor market before feeling confident about a reduction.”
At this stage, the stance the Fed takes is extremely important. Statements made by Powell on May 1st will be crucial. If Powell outlines a new path aiming for a longer-term achievement of the 2% target and starts reductions in the third quarter, this will be favorable for cryptocurrencies.
