Inflation risks could restrict Fed’s 2025 policy moves, impacting risk assets: analysts
2024-12-16
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Bitcoin surged to over $106,000 in early trading on Monday, setting a new all-time high before pulling back to $104,500. The price movement reflects both strong market sentiment and ongoing macroeconomic uncertainty ahead of the U.S. Federal Reserve’s highly anticipated interest rate decision this Wednesday.
The Fed is widely expected to reduce the benchmark borrowing rate by 25 basis points, bringing it to the 4.25% to 4.5% range. This move would mark a cumulative 100 basis points of easing since September, as the central bank prioritizes growth amid signs of a slowing economy. However, concerns remain over the persistence of inflation, highlighted by recent increases in both U.S. CPI and PPI data, which suggest price pressures could resurface in 2025.
Federal Reserve began its rate cutting cycle in September. Image: Trading Economics.
The CME FedWatch tool currently assigns a 97% probability to a 25-basis-point rate cut at the Dec. 18 Federal Open Market Committee meeting. While lower interest rates generally encourage investors to allocate capital to risk assets like bitcoin, analysts caution that the Fed’s accompanying commentary at Wednesday's FOMC meeting may temper expectations for further easing. The central bank will also release updated economic projections and its dot plot, offering fresh insights into policymakers’ outlook for 2025.
Inflation, yields and policy speculation
Despite the rate cut expectations, rising inflation concerns have complicated the outlook. Recent U.S. CPI and PPI data have triggered concerns of potential price pressures next year, particularly in light of speculation surrounding the economic policies of U.S. president-elect Donald Trump, who is set to take office in January 2025. Trump’s proposed policies—including tariffs, immigration controls, and personal and corporate tax cuts—could drive inflation higher.
ING Bank analysts suggest these developments may lead to a slower, more measured pace of easing in 2025. "President-elect Trump’s policy thrust of immigration controls, tariffs and personal and corporate tax cuts are likely to mean the Fed signals a shallower, slower path of easing through 2025," ING analysts said.
However, while macroeconomic events remain influential, QCP Capital analysts argue that bitcoin’s recent rally has been primarily sentiment-driven. They noted that this week’s U.S. Federal Reserve meeting may serve as background noise for bitcoin, which remains buoyed by institutional momentum and its growing status as a store of value. "However, while highly unlikely, an extremely dovish Fed and Powell could still provide the push bitcoin needs to climb even higher," QCP Capital analysts added.
The BTC/Gold ratio reached an all-time high during the latest price surge, further strengthening bitcoin’s narrative as “digital gold.” Bitcoin’s performance has been amplified by institutional interest, with MicroStrategy’s recent inclusion in the Nasdaq 100 index adding to the positive sentiment. MicroStrategy executive chairman Michael Saylor has hinted at further bitcoin acquisitions even with prices of the digital asset exceeding $100,000. "This inclusion could trigger passive fund inflows into MicroStrategy shares, indirectly enabling the company to raise funds more easily for acquiring bitcoin," QCP Capital analysts said.
Bitcoin's price has increased by over 2% in the past 24 hours, currently trading at around $104,769 at the time of writing, according to The Block's Price Page.
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