The Fed has a reason not to raise interest rates. What does this mean for crypto?

Over the past few weeks, the crypto market has been watching almost every piece of news coming out of the United States with the same question – will the Federal Reserve be forced to raise interest rates again?

The reason is simple. Higher interest rates mean more expensive financing and less available capital for risk assets such as Bitcoin. When rates are lower, the effect is usually the opposite.

After the Fed's meeting at the end of July, concerns about another rate hike increased. However, the latest inflation data is beginning to change the picture.

And that could turn out to be good news for the crypto market.

Inflation Is High, but the Reason Matters

The Federal Reserve has kept its benchmark interest rate in the 3.50–3.75% range for five consecutive meetings. At the latest meeting, however, three members voted in favor of an increase.

The main argument is inflation.

In July, consumer prices rose by 3.4% compared with a year earlier – still significantly above the Fed's 2% target.

But a large part of the pressure is coming from energy.

Energy prices have risen by 14.7% over the past year, while gasoline prices are up 24.6%. This is largely linked to high oil prices and the ongoing tensions around the Strait of Hormuz.

The problem is that higher interest rates will not produce more oil.

Core inflation, which excludes food and energy, is far more important for the Fed. And there, the picture looks better.

Core prices rose by just 0.2% in July and by 2.5% over the past year – the slowest pace since March 2021.

In other words, inflation is still a problem, but most of the current pressure is coming from a factor over which the Fed has relatively little influence.

The Economy Is Sending Another Interesting Signal

The latest data also shows something else.

U.S. companies are producing more without labor costs rising at the same pace.

Output increased by 2.5% compared with a year earlier, while hours worked rose by only 0.2%. At the same time, unit labor costs increased by 1.4%.

This means we are not currently seeing the dangerous combination of rapidly rising wages and prices that would give the Fed a strong reason to raise interest rates.

Unfortunately, there is another side to the story...

In July, U.S. employers cut 23,000 jobs, compared with expectations for 95,000 new jobs.

In other words, inflationary pressure is gradually easing while the labor market is beginning to show signs of weakness.

That makes another interest rate hike increasingly difficult to justify.

The Market Is Already Changing Its Expectations

Until recently, the scenario looked relatively straightforward:

More expensive oil → higher inflation → higher interest rates for longer.

The latest data does not solve the oil problem, but it weakens the link between high energy prices and the need for the Fed to raise rates again.

The market is already reacting.

According to Polymarket, the probability of a September rate hike has fallen to around 33%, while the chance of rates remaining unchanged is around 67%.

Just two weeks earlier, a rate increase was the more likely scenario.

What Does This Mean for Crypto?

This still does not mean that the Fed is about to start cutting rates.

But it does mean that one of the main threats facing the crypto market in recent months is beginning to weaken.

There are still more inflation and labor market reports to come before the September meeting. If core inflation continues to ease and employment remains weak, another rate hike could gradually fall off the agenda.

At that point, the question will no longer be whether the Fed will raise rates.

It will be when the Fed can begin cutting them again.

And that kind of shift in expectations could create a significantly more favorable environment for Bitcoin and the broader crypto market.

And What Does the Situation Look Like Beyond Interest Rates?

The macroeconomic environment is only part of the picture.

Altcoins.bg founder Rostislav Totev also discusses where risk capital is currently flowing, why investor interest in crypto remains weak, and what is happening behind the scenes in the industry in his latest interview with Bloomberg TV Bulgaria.

Watch the full interview:
“Bankers Are Already Seeing Serious Money in Crypto – for Everyone Else, It Is Crypto Winter”