Cryptocurrency market performance is highly influenced by the current state of the US economy. Despite the challenges faced by investors due to interest rate hikes starting in 2022, the countdown to interest rate cuts has begun. So, what do the latest discussions on inflation and recession indicate for crypto?
Fed and Delayed Cuts
The Fed interest rates have remained at their peak for over a year, leading to accusations that the institution is moving slowly despite falling inflation. Powell mentioned in recent meetings that they need to be convinced of the decline in inflation based on upcoming data. The institution’s failure in its employment mandate has become evident with labor data over the past few months.
The Kobeissi Letter responded to those who believe interest rates are high in its latest assessment, writing;
“Have US interest rates been too high for too long?
Adjusted for core CPI inflation, the Fed funds rate has risen to 2.33%, the highest level since October 2007. Due to the Fed’s sharp rate hikes, real rates have increased by about 8 points over the past 2 years. Real rates are now even higher than before the 2020 pandemic.
Whenever rates have become this restrictive in the past, the US economy has subsequently entered an economic downturn. Is the Fed moving too late again?”
With a 180-degree policy shift, recession expectations are strengthening. The scale of layoffs, especially in tech companies, confirms economic stagnation expectations and poses a threat to cryptocurrencies. If concerns are justified and the US economy enters a recession, it could trigger a larger global collapse.
Inflation Expectations
In a recession environment, cryptocurrencies perform negatively, and a few months ago, our concern was stagflation. This term refers to a period where production weakens, unemployment rises, but inflation also increases. On a global scale, stagflation could make the Fed’s job even harder. Therefore, the Fed aims for gradual 25bp cuts without rushing, avoiding economic shocks.
Fed‘s Christopher Waller reiterated Powell’s “time has come” statement from Jackson Hole in his remarks on Friday. This week’s upcoming inflation data is expected to show a 0.2% monthly decline in Core CPI.
The headline inflation expectation is 2.6%, compared to the previous month’s 2.9%. Inflation data below expectations could make the Fed’s job easier, potentially leading to an increase in crypto.
