The Federal Reserve is having to play a game of Whac-A-Mole to keep crypto prices from going up. This could mean that monetary policy will be more aggressive for a longer time. This could hurt the prices of risky assets like stocks and cryptocurrencies.
Risk assets, like crypto, may now have a harder time getting where they want to go. It turns out that the U.S. inflation rate isn’t going down as much as economists thought it would.
The latest number comes from the U.S. Consumer Price Index, which was released on Tuesday. It showed that the 12-month inflation rate slowed to 8.3% in August from 8.5% the month before. This small drop is likely to keep investors worried about crypto price pressures that won’t go away. People thought that the CPI would slow to 8.1%. The Federal Reserve wants inflation to stay at 2% per year.
Food prices went up, but energy prices went down. Over the course of the month, the price index for cereals and baked goods went up by 1.2%.
The so-called core CPI rate, which takes out the effect of fluctuating food and energy prices and is thought to be a better measure of demand-driven inflation, rose 0.6% from one month to the next, which was twice what was expected.
Jon Turek, who writes the Cheap Convexity blog, says that the fact that the core CPI was higher than expected shows that inflationary pressures are still a problem and that the Federal Reserve should change its expectations in a “hawkish” way.
How crypto Prices affects the Federal Reserve
Before the data came out, interest-rate traders thought that the Fed would raise borrowing costs by 0.75 percentage points at its monetary-policy meeting next week, followed by moves of 50 basis points in November and 25 basis points in December. This would have put the benchmark interest rate between 3.75 and 4 percent by the end of the year. In general, traders in traditional markets thought that the Fed would stop raising rates next year and switch to easing liquidity by June 2023.
But since inflation is still high, the Fed might have to delay the planned break and make two more 75-bps hikes before slowing down in December and January.
Turek sent out a tweet after the CPI came out: “I think the prices should now be 75, 75, 50, and 25. Which is a big change from the possibility of 75, 50, 25, and pause. Now, that change has to be taken on by the market.”
After the CPI came out, the prices of risky assets fell, with bitcoin dropping from $22,700 to nearly $21,000. Ether, the native token of Ethereum’s blockchain, dropped from $1,760 to $1,594. This was a sign that macroeconomic changes were more important than the bullish story about that blockchain’s Merge, which is a change to a more energy-efficient blockchain system that is expected to happen this week.
The U.S. Dollar Index, which tracks the dollar’s exchange rate against major fiat currencies like the euro, went up by more than 1% to 109.55, ending a four-day losing streak.
Futures trading in federal funds now shows that there is a small chance that the Fed will raise rates by 100 basis points next week. This suggests that the rate-hike cycle will reach its highest point in March 2023, when rates will be 4.25 percent. The so-called “terminal rate” was priced at 4% before inflation data was taken into account.
This year, the Fed raised the benchmark interest rate for borrowing by 225 basis points, which shook up risky assets. It also started reducing its balance sheet by $95 billion per month this month.
