Inflation Surprise Delays Fed Rate Cut Expectations, Bitcoin Quickly Recovers
The U.S. Consumer Price Index (CPI) report for January 2025 showed inflation rising more than expected, leading to a shift in market expectations for Federal Reserve policy.
Core CPI rose 3.3% year-over-year, exceeding the 3.1% estimate, while overall CPI climbed 3% annually, slightly above the 2.9% forecast. Following the inflation data release, market participants began to push back expectations for the Federal Reserve’s first interest rate cut to December from September. Federal Reserve Chair Jerome Powell stated, "We are close but not there on inflation. Today’s inflation print says that as well. We want to keep policy restrictive for now," Associated Press reported.
The CPI is calculated based on the price changes of a representative basket of goods and services, weighted by their importance. It provides a broad estimate of inflation over an entire month rather than a single day. In contrast, the Producer Price Index (PPI) measures price changes at the wholesale level before they reach consumers, offering a different perspective on inflationary pressures.
Bitcoin and Crypto Markets React
Risk assets, including Bitcoin and other cryptocurrencies, initially saw a brief decline as higher interest rates tend to weigh on speculative investments.
Bitcoin (BTC) initially dropped to $94,200 following the inflation report but rebounded sharply, reaching a high of $98,100 within hours. BTC is currently trading at $97,551, marking a 2% increase over the past 24 hours.
The quick recovery suggested that traders were positioning for a "sell the rumor, buy the news" scenario, despite expectations of tighter monetary policy.
Ethereum (ETH) followed a similar pattern, dropping to $2,571 before recovering to $2,743 currently.
The higher-than-expected inflation and potential absence of multiple rate cuts in 2025 could dampen investor sentiment toward the crypto market. However, if U.S. President Trump continues advocating for policies that support the digital asset industry, it may offset some of the negative impact from restrictive monetary policy, potentially fueling a crypto rally.
BRN analyst Valentin Fournier said in his daily market update that the quick dip and rebound highlight the dominance of market psychology over inflation in driving Bitcoin’s price: "As inflation should theoretically strengthens Bitcoin’s appeal as a scarce asset, retail investors are realizing its limited sensitivity to short-term macro shifts—despite growing institutional involvement."
"Bitcoin’s resilience to inflation-related news suggests a weaker-than-expected correlation, reducing the risk of future negative inflation data impacting its price," Fournier added.
The global crypto market cap rose to $3.23 trillion, reflecting a 2.91% increase over the last day.