Cryptocurrency prices edged upwards on Tuesday after a widely-watched inflation gauge bolstered traders’ belief that the Federal Reserve could skip raising rates at a key meeting later this week.
The Consumer Price Index (CPI) rose 4% in the 12 months through May, the Bureau of Labor Statistics (BLS) said Wednesday, matching economists’ expectations.
The index, which tracks price movements across a broad range of goods and services, rose 0.1% in May on a month-to-month basis—following a 0.4% bump in April and a 0.1% increase in March.
“To me, this kind of sets the tone for ‘quiet on the U.S. macro front’ for the rest of the week,” Amberdata’s Director of Derivatives Greg Magadini told Decrypt, describing the CPI print a wildcard compared to the Fed’s meeting or the BLS’s Producer Price Index, which is set to drop tomorrow.
Digital assets like Bitcoin and Ethereum rose after the report, increasing 1.4% to $26,300 and 0.8% to $1,760 over the past day, respectively, according to CoinGecko.
Altcoins, such as Polygon, Cardano, and Solana were also in the green, led by XRP, which posted daily gains of 6.6% at $0.55.
Rising shelter costs contributed the most to the index’s increase in May, which rose 0.6% on a monthly basis, the BLS said. However, the price of energy-related products and services declined 3.6% last month, largely from a drop in the price of fuel oil.
“We'll probably see a rally based on these numbers, but headwinds on these regulatory developments are still kind of [taking] precedent.,” Managing Director at Wave Digital Assets Nauman Sheikh told Decrypt, referring to the Securities and Exchange Commission’s latest lawsuits against Binance and Coinbase that have rattled crypto markets.
While the Fed kept interest rates at near-zero in 2021 and held firm that inflation was transitory as the economy ran red-hot, the U.S. central bank embarked on an aggressive campaign to tame inflation in March of last year.
Ratcheting interest rates to their highest levels since 2007, the Fed has delivered 10 straight rate hikes so far in its fight against rising consumer prices.
Tuesday’s report comes a year after inflation topped out around 9% last June, the steepest annual pace seen in four decades—and far above the Fed’s target of 2%.
As inflation shows signs of steadily cooling, anticipation among traders has grown that the Fed could keep rates where they’re currently at. According to the CME Group’s FedWatch Tool, there’s a 97% chance the Fed holds rates steady on Wednesday, a notable increase from 75% the day before.
It would be the first time the Fed has decided not to continue tightening monetary policy in 18 months. By raising interest rates, the Fed makes it more expensive for businesses and consumers to borrow—from credit cards to car loans—thus cooling the economy.
Aside from impacting the economy, rate hikes influence the prices of assets, whether that’s cryptocurrencies, stocks, or U.S. Treasuries. As interest rates rise, so-called risk assets like stocks and crypto typically dip, as cash reserves and government debt become more attractive investments by comparison.
On top of interest rate hikes from the Fed, risk assets will likely face pressure in the coming months as the U.S. Treasury Department essentially refills its bank account and drains liquidity from markets, Head of Research at 3iQ Mark Connors told Decrypt.
The department’s Treasury General Account (TGA), used for day-to-day business by the federal government, dipped as low as $23.4 billion as debt limit negotiations played out on Capitol Hill. Now that it has the green light to issue more debt, the department will likely issue around $1 trillion in Treasury Bills over the next nine months, Connors said.
“When that money comes out of the private economy and into the government, markets go lower,” he said. “Inflation is coming lower, the economy is moderating, and when the Treasury takes away our liquidity, that's going to be pretty loud.”
At the last Federal Open Market Committee meeting, Chair Jerome Powell signaled additional rate hikes may be needed to quel inflation, but he said the central bank would take a data-dependent approach to rate hikes moving forward.
He is expected to speak on Wednesday at 2 pm EST, shortly after the Fed unveils its next move.