Due to high inflation, bitcoin fell over 4 percent, ethereum over 6 percent

The annual inflation rate in the U.S. has slowed for the third consecutive month, but it is still much higher than the Federal Reserve’s target. The U.S. Bureau of Labor Statistics released the latest Consumer Price Index report on Thursday, showing that inflation cooled by 10 basis points (0.1 percent) in September. The price of goods increased by 8.2 percent year-on-year last month, which is 0.1 percent higher than economists’ expectations. The CPI increased by 0.4 percent on a monthly basis.

Although the last few CPI data have shown that inflation may have peaked, the markets initially reacted negatively, then positively to yesterday’s news. Major U.S. stock indices, such as the Dow Jones and Nasdaq 100, fell before trading, while the crypto market also recorded a sharp decline. Bitcoin fell over 4 percent, while the second-largest cryptocurrency, ethereum, fell over 6 percent. However, a few hours later, a recovery followed, and the crypto market returned to previous levels.

Despite hopes that inflation will quickly retreat towards the Fed’s 2 percent target, 8.2 percent indicates that it is ‘sticky’, and therefore could remain high longer than expected. High inflation and slow economic growth are bad news for risk assets like crypto.

What is the Fed doing?

Traders have been closely monitoring inflation this year, as the figure has a key impact on the Federal Reserve’s moves. As inflation rose, the U.S. central bank responded with an aggressive tightening policy, raising interest rates to 3 to 3.25 percent, a level not seen since the global financial crisis of 2008.

The increase in interest rates is relevant for traders and investors as it often affects nearly all forms of investment due to the rising cost of borrowing money. The Fed’s ‘hawkish’ stance is likely the biggest factor behind the sharp decline since November 2021.

The U.S. central bank is the most powerful force in global markets, and the recent economic crisis has led Chairman Jerome Powell and his team to adopt a restrictive stance that has impacted the markets. It has also had several side effects, such as strengthening the dollar against other global currencies.

The Fed has repeatedly indicated that it ‘hopes’ for a decline in inflation to 2 percent. Current estimates predict that the funds rate could peak at 4.6 percent in 2023, which would mean further interest rate increases on the horizon. Powell typically announces rate hikes at Federal Open Market Committee (FOMC) meetings. The last two are expected to be held in November and December.

What’s next for crypto?

As inflation declines at a snail’s pace, it may take some time before crypto shows renewed signs of life. Several traders have indicated that a change in the Fed’s stance could serve as a key turning point for the market, as stopping price increases would reduce pressure on risk assets.

Billionaire hedge fund manager Paul Tudor Jones stated earlier this week that the Fed’s change is likely to lead to significant growth in various investments, including crypto, but he emphasized his comments by warning that he believes the United States is already in or heading towards a recession.

While the U.S. 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 emerged indicating that the Fed is still not ready to show mercy to the markets. Powell has made the case this year that the unemployment rate in the country is relatively low when examining the state of the economy, having fallen to 3.5 percent last month. Jones and others have warned that the Fed will wait for higher unemployment rates before stimulating economic growth.

Bitcoin has historically been labeled as ‘digital gold’ that can act as a hedge against monetary inflation, and although crypto advocates have long hoped that the asset class would trade independently of stocks and central bank moves, this year’s price action has increased hopes in the short to medium term. As bitcoin still reacts to inflation and the Fed, the macro landscape will likely need to improve for crypto to record significant growth.