Bitcoin and Ethereum hold firm after further signs of falling inflation

[ad_1]

Consumer prices fell slightly in December as Bitcoin and other cryptocurrencies held firm on hopes of a smaller interest rate hike from the Federal Reserve.

The Bureau of Labor and Statistics said Thursday that its consumer price index (CPI) rose 6.5% in the 12 months to December, down from 7.1% in November. Analysts had expected the index, which tracks price movements across a wide range of goods and services, to show inflation slowing to 6.5% on an annual basis.

Bitcoin saw notable gains ahead of the report release and after, rising 5% from the previous day to $18,275, according to data from CoinGecko.

Ethereum also rose 5% to $1,401 and other altcoins, such as Cardano and Polkadot, rose 3.8%.

The market seems to be interpreting this as accommodating, for the most part, James Butterfill, head of research at CoinShares, told Decrypt. From a crypto perspective, this is likely to be favorable as well.

Major stock indices also reacted favorably to the report, a worrying sign of similarity between crypto and traditional markets, said Stefan Rust, chief executive of Laguna Labs.

It’s a worrying trend to see Bitcoin moving at the same pace as traditional financial indicators and stock markets, he said. As we know Bitcoin was founded to be an alternative financial system to Wall Street, and it seems that we are losing our way.

The month-on-month pace of inflation showed prices fell 0.1% in December, after rising 0.1% in November and 0.4% in October. The decrease was partly attributed to a month-over-month drop in the price of gasoline and fuel oil, which fell 9.4% and 16.6%, respectively.

Core CPI, a measure of inflation that excludes food and energy price volatility, edged up 0.3% in December to 5.7% year-on-year, in line with market expectations. analysts.

The annual inflation rate has fallen steadily since peaking at 9.1% in June last year, which was the highest 12-month index in 40 years. However, inflation remains well above the Fed’s target of 2% per year.

To rein in soaring prices, the Fed raised its benchmark interest rate seven times last year, from near zero to between 4.25% and 4.5%. By raising interest rates, the Fed makes borrowing more expensive for businesses and consumers, which cools the economy.

As interest rates rise, investors typically flee riskier assets like stocks and crypto for the guaranteed returns offered by more conservative assets like US Treasuries, with so-called risk-free returns due to the government support.

After raising interest rates by 75 basis points in four consecutive policy meetings, the US central bank showed signs of easing in December by raising rates by 50 basis points.

Rate hike expected in February

Thursday’s inflation report will likely feed into the next central bank policy meeting in February, where the Fed is expected to raise rates again. But the Fed also considers other economic factors, such as the strength of the US labor market, when making decisions.

The Fed has essentially walked a tightrope as it aims to grapple with a decades-long inflation spree. By acting too timidly, inflation could take root in the financial system, but if the Fed raises rates too aggressively, it could tip the economy into a recession.

However, analysts are more confident the Fed will continue its softer approach to rate hikes after Thursday’s CPI report. The likelihood of the Fed raising rates by a quarter of a percentage point from half a percentage point rose to 94% from 76% the previous day, according to the CME tool FedWatch.

I think they will likely rise 50 basis points and stay on track for now, CoinShares’ Butterfull argued. Keep in mind that what the Fed should do and what it will do are different things.

At an event hosted by Sweden’s central bank, Sveriges Riksbank, Fed Chairman Jerome Powell acknowledged that rate hikes were painful, but said they were key to maintaining the health of the economy. long-term economy, according to CNN Business.

Price stability is the foundation of a healthy economy and provides the public with immeasurable benefits over time, he said. But restoring price stability when inflation is high may require measures that are not popular in the short term.

Stay up to date with crypto news, get daily updates in your inbox.

[ad_2]