Key learning points
- US inflation fell from 8.3% to 8.2% year on year in September.
- Although the Consumer Price Index fell 10 basis points, the decline was smaller than economists expected.
- With inflation still high and the economy in crisis mode, the Fed will likely continue to raise interest rates, suggesting that crypto will continue to suffer.
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Inflation has now chilled for three consecutive months.
US inflation Reached 8.2%
Inflation in the US continues to fall— but it’s still hotter than the Federal Reserve would like.
The Bureau of Labor Statistics dropped its latest consumer price index report on Thursday, showing that inflation has cooled 10 basis points in September.
The price of goods increased by 8.2% on an annualized basis last month, higher than economists’ broad expectation of 8.1%. Monthly, the CPI increased by 0.4%.
Despite coming in higher than expected, today’s pressure is the third straight monthly decrease in US inflation, next a record high in 40 years reading of 9.1% in June 2022.
While the latest CPI numbers suggested that inflation may have peaked, markets reacted negatively to today’s reading. Major US stock indices such as the Dow Jones and Nasdaq 100 plummeted in pre-market trading, while the crypto market also saw a sharp decline. Bitcoin is down more than 4%, while the second largest cryptocurrency, Ethereum, sold more than 6%.
Despite hopes that inflation would quickly retreat towards the Fed’s 2% target, the 8.2% reading indicates that it is “sticky” and may therefore remain high for longer than expected. High inflation and slow economic growth are bad news for risk assets like crypto and the broader financial markets.
watching feds
Traders have been keeping a close eye on inflation this year as the numbers have a significant impact on the movements of the Federal Reserve. With inflation soaring, the US central bank has responded with an aggressive economic tightening policy, raising interest rates from 3% to 3.25%, a level not seen since the global financial crisis in 2008.
Rate hikes are relevant to traders and investors as they tend to affect risky assets due to the rising cost of borrowing money. The Fed’s aggressive stance may be the biggest factor behind the staggering $2 trillion crypto leach since November 2021.
The US Federal Reserve 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 brutal stance that has plagued the stock and crypto markets. It has also had several knock-on effects, such as a strengthening of the dollar against other global currencies, which then held back risky assets.
The Fed has repeatedly stated that it wants to bring inflation to 2%. Current estimates have predicted that the fund rate could peak at 4.6% in 2023, putting further rate hikes in the offing. Powell usually announces rate hikes at the central bank’s Federal Open Market Committee meetings; the last two of the year take place in November and December.
What’s next for Crypto?
With inflation declining at a snail’s pace, it may be some time before crypto shows signs of life again. Many traders have suggested that a central hub of the Fed could serve as a critical turning point for the market, as a halt to rate hikes would reduce pressure on risky assets. Billionaire hedge fund manager Paul Tudor Jones said earlier this week that the Fed’s dovish stance was likely to lead to “a massive rally in a variety of depressed inflation trades, including crypto,” but he preceded his remarks by warning that he thought the US was already in a recession or headed for a recession.
While the US economy contracted for two consecutive quarters in the first half of the year, the National Bureau of Economic Research has not yet declared a recession and no signs have surfaced that the Fed is willing to show mercy to the markets. Powell has argued throughout the year that the country’s unemployment rate is relatively low when asked about the state of the economy; it fell to 3.5% last month. Jones and others have warned that the Fed will wait for higher unemployment rates before stimulating economic growth, suggesting that a turnaround may be a long way off pending the economy officially entering recession.
Bitcoin has historically been touted as a “digital gold” that can serve as a hedge against monetary inflation, and while crypto proponents long hoped that the asset class will trade independently of stocks and central bank movements, this year’s price action has dashed their hopes in the short to medium term. As Bitcoin continues to respond to inflation and the Fed, the macro landscape will likely need to improve before crypto can show a significant increase.
Bitcoin reached an all-time high of over $69,000 when the cryptocurrency market hit $3 trillion in November 2021. Now almost a year into a bear market, a new all-time high is likely still a long way off. As long as inflation is still high, the crypto-believers will likely wait for the so-called “up only” mode to resume.
Disclosure: At the time of writing, the author of this piece owned ETH and several other cryptocurrencies.