Fed’s January 31 Announcements Trigger Crypto Market Decline

Bitcoin (BTC) dropped to $104,600 following the latest Federal Reserve statements, with the US PCE data aligning with expectations. The Personal Consumption Expenditures (PCE) Index for December 2024 indicated an increase compared to the previous month. While the Fed’s stance on slowing rate cuts after a 100 basis point (bp) reduction is concerning for risk markets, the absence of rapid inflation spikes offers some relief.

Fed Announcements and Interest Rates

The PCE data is a key inflation indicator for the Federal Reserve, and its current reading shows deviation from the 2% target. The previous figure of 2.4% was already close to the Fed’s goal set for the next two years. Historically, sharp declines have fueled crypto rallies, but the recent stabilization suggests a different market reaction this time.

Former President Donald Trump continues his efforts to reduce energy prices, which could help moderate PCE inflation, given that energy costs contribute significantly to the index. Additionally, the holiday season likely inflated December figures, making the latest data less alarming. Trump is closely monitoring these numbers and preparing policy adjustments, as he remains adamant about lowering interest rates.

Fed Official Bowman’s Cautious Stance

Fed member Michelle Bowman delivered a cautious outlook, causing BTC to slide further during her remarks:

*“Current policy allows the Fed to monitor incoming data and assess the economic effects of the Trump administration’s policies before making further rate adjustments.

While easy financial conditions and high asset prices may slow inflation progress, monetary policy does not appear to exert excessive pressure on the economy. The labor market is not particularly tight, yet wage growth remains inconsistent with the 2% inflation target.

I am closely watching long-term Treasury yields as a potential signal that markets anticipate tighter policies to curb inflation. The first-quarter data will be crucial in determining how quickly inflation improves moving forward. Geopolitical tensions, supply chain disruptions, and post-election demand surges could further drive inflation.

Rate cuts are expected this year, but future moves should be cautious and gradual, allowing time to assess data.”*

Following the inflation data, short-term US interest rate futures declined, while investors still anticipate the next Fed rate cut in June.