Headline U.S. inflation figures hit a multi-decade high last month, exceeding the expectations of multiple analysts.
The Consumer Price Index for All Urban Consumers (CPI-U) climbed 9.1% during the year through June before seasonal adjustment, Bureau of Labor Statistics data shows.
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The strength of this consumer price data could make it easier for Federal Reserve policy makers to continue their plans to aggressively hike the federal funds rate, which in turn affects broader borrowing costs.
In June, the central bank increased this benchmark rate by 75 basis points, which represented the largest change in 28 years. This move came after Fed policy makers raised the federal funds rate 50 basis points in May and 25 basis points in March.
Should the financial institution continue in this direction, it could place downward pressure on bitcoin prices by fueling dollar strength. Further, higher interest rates could reduce demand for the digital currency by making interest-bearing securities more appealing.
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Several analysts commented on this situation, elaborating on how these developments could impact the price of the world’s most well-known digital currency.
“The fed is committed to curbing inflation with aggressive rate hikes, which continues to make lower risk securities that produce yield more and more attractive,” said Brett Sifling, an investment advisor for Gerber Kawasaki Wealth & Investment Management.
“This shift in liquidity is a big deal for risk-on assets, as it causes a lot of volatility and the wild price swings we’re seeing in most markets,” he noted.
“Bitcoin continues to get more correlated to growth/tech equities, which don’t do too well in this environment,” said Sifling.
“Speculative assets like crypto will continue to tighten under these inflationary and low liquidity conditions,” he predicted.
Michael Rosmer, the CEO and co-founder of cross-chain asset management dashboard DeFiYield, also weighed in.
“With the CPI numbers coming in higher than expected, I think most are anticipating an even more aggressive response from the Federal Reserve,” he stated.
“Rate hikes could be higher – perhaps even 100 basis points next round – and last for several more months,” said Rosmer. “Bitcoin – along with tech – most likely will experience more downwards pressure as a result.”
“As big as their recent sell-offs have been recently, there’s certainly more room to fall,” he continued.
“I think you’re seeing investors already parking their money into dollars as a result of global macro uncertainty, and these latest CPI numbers might also be a boost for interest-bearing instruments.”
Fed Policy Risks
However, Rosmer warned that if Fed policy makers go too far in boosting rates, it could “break” the credit markets. This could cause economic conditions to deteriorate significantly.
“It does seem certainly possible for Bitcoin to hit $15,000 or lower,” said Rosmer. “However, I suspect the macro environment will shift here rather dramatically. Fears of recession will mount.”
“Consumers are in turn poised to take on more debt – after all, we’ve seen rising consumer credit levels as people don’t want to reduce their lifestyle even as costs rise. With rising interest rates, this increases the risk of defaults, bankruptcies and reduced spending, all of which bode negatively for asset prices.”
As a result, the central bank may very well change course, he said.
“The Fed will likely have to back off tightening and perhaps even ramp up quantitative easing again in the not-too-distant future,” said Rosmer.
“All of which is to say, Bitcoin and crypto assets might be poised for a leg down, yes, but the macro environment is now shaping up in a way that will likely see its price continue on its upwards trajectory in the coming months. This will take time, but the chorus of Bitcoin naysayers are going to be in for a surprise.”
“For the time being, risk-off assets will probably outperform. Yield-bearing instruments will do well given the rate increases,” he stated.
“The dollar might very well continue exploding upwards, wreaking havoc on markets. And as the latter continues to happen, the Fed risks breaking things, such as credit markets or a big crash in equities,” said Gale.
“Given that prices for oil and other key commodities are falling, there’s room for the Fed to back off its tightening, and likely soon given the risk of slowing growth. When this happens, recession will be on everyone’s mind,” he continued.
“And then equities and Bitcoin will likely have bottomed. From there, I suspect, we will see the beginnings of Bitcoin’s climb upwards.”
“It’s going to take time for this scenario to unfold, but in the next year or two I wouldn’t be surprised to see Bitcoin approaching all-time highs again.”
Disclosure: I own some bitcoin, bitcoin cash, litecoin, ether, EOS and sol.