Although the consumer price index fell by 10 basis points, the decline was less than economists expected. As inflation remains high and the economy is in crisis mode, the Fed will likely continue to raise interest rates, suggesting that crypto will continue to suffer. Inflation has been contained for three consecutive months.
U.S. inflation is at 8.2 percent.
U.S. inflation continues to fall, but it’s still higher than the Federal Reserve would like. The Bureau of Labor Statistics released the latest Consumer Price Index report on Thursday, showing that inflation fell 10 basis points in September.
Goods prices rose 8.2 percent on a yearly basis last month, beating economists’ general expectations for an 8.1 percent figure. On a monthly basis, the CPI rose 0.4 percent.
Although higher than expected, today’s print is the third consecutive monthly decline in U.S. inflation, following a 40-year high of 9.1% in June 2022.
Although the latest CPI numbers indicated that inflation may have peaked, markets reacted negatively to today’s reading. Major U.S. stock indexes, such as the Dow Jones and Nasdaq 100, fell in pre-market trading, while the crypto-currency market also saw a sharp decline. Bitcoin is down more than 4 percent, while the second largest crypto-currency, Ethereum, has sold off more than 6 percent.
Despite hopes that inflation would quickly retreat to the Fed’s 2% target, the 8.2% reading shows that it is “sticky” – and thus could remain high for longer than expected. High inflation and slow economic growth are bad news for risk assets like crypto-currency and financial markets in general.
The Fed on the lookout
Traders have been keeping a close eye on inflation this year, as the numbers have a determining influence on the Federal Reserve’s actions. Faced with soaring inflation, the U.S. central bank responded with an aggressive policy of economic tightening, raising interest rates from 3% to 3.25%, levels not seen since the 2008 global financial crisis.
Interest rate hikes are important to traders and investors because they tend to impact risky assets through higher borrowing costs. The Fed’s hawkish stance is arguably the biggest factor behind the staggering $2 trillion crypto washout since November 2021.
The U.S. central bank is the world’s most powerful force in global markets, and the recent economic crisis has led Fed Chairman Jerome Powell and his team to take a ruthless stance that has battered stocks and crypto markets. It also had several ripple effects, such as strengthening the dollar against other global currencies, which then held back risk assets.
The Fed has repeatedly indicated that it hopes to bring inflation down to 2 percent. Current estimates suggest that the funds rate could peak at 4.6% in 2023, which would mean further interest rate hikes on the horizon. Powell typically announces rate hikes at the central bank’s Federal Open Market Committee meetings; the last two of the year are scheduled to take place in November and December.
What’s next for crypto-currencies?
With inflation falling at a snail’s pace, it could be some time before crypto shows renewed signs of life. Many traders have suggested that a Fed pivot could serve as a crucial turning point for the market, as a halt in rate hikes would take pressure off risk assets. Billionaire hedge fund manager Paul Tudor Jones said earlier this week that the Fed’s reversal would likely lead to “a massive rally in a variety of beaten-down inflationary trades, including crypto“, but he prefaced his comments by warning that he thought the U.S. was already in or headed for a recession.
Although the U.S. economy contracted for two consecutive quarters in the first half of the year, the National Bureau of Economic Research has yet to declare a recession, and no signs have surfaced to suggest that the Fed is yet ready to show mercy to the markets. Throughout the year, Powell has argued that the nation’s unemployment rate is relatively low when asked about the state of the economy; it fell to 3.5 percent last month. Jones and others have warned that the Fed will wait to see higher unemployment rates before stimulating economic growth, suggesting that a pivot may be off the table until the economy officially enters a recession.
Historically, bitcoin has been touted as a “digital gold“which can serve as a hedge against monetary inflation, and while crypto currency advocates have long hoped that the asset class would trade independently of equities and central bank moves, this year’s price action has dashed their hopes in the short to medium term. As bitcoin is still reacting to inflation and the Fed, the macroeconomic landscape will likely have to improve for the crypto to post a meaningful rise.
Bitcoin hit an all-time high above $69,000 as the crypto-currency market surpassed $3 trillion in November 2021. Now, nearly a year into a bear market, a new record is probably still a long way off. As long as inflation is still hot, the crypto faithful probably have a wait to come until the so-called “bullish only” mode resumes.