Treasury yields and CPI data fuel market jitters before Fed’s next move

How will inflation, strong employment data and rising Treasury yields shape the Fed’s upcoming interest rate decision?

While markets eagerly await clarity on interest rate policy, the Fed’s meeting on January 29 looks important.

Considering that, according to market estimates, there is a 97.3% chance that interest rates will remain stable in the 4.25%-4.5% range and that a 25 basis point rate cut is only a slim chance of 2.7%, the Fed’s decision is a growing concern. depends on the data.

Chairman Jerome Powell announced at his December meeting that future rate cuts will depend on economic indicators; This is a point reinforced by the central bank’s gradual change in the last three rate cuts of 50 basis points in September, 25 basis points in November and 25 basis points in December.

For the crypto market and Bitcoin (BTC), which is currently trading at $94,840 and is down nearly 7% over the past week, the Fed’s decision could lead to either renewed interest or more pressure.

BTC 6-month price chart | Source: crypto.news

Let’s examine key economic data and their potential crypto implications.

Economic indicators: A mixed bag for the Fed

Inflation remains the Fed’s arch-enemy, but the latest figures show the battle is far from over. December’s Consumer Price Index is expected to rise 2.8% from 2.7% in November, marking its third consecutive monthly increase and the highest level since July 2024.

Core CPI, the Fed’s preferred measure that excludes volatile food and energy prices, is expected to rise 0.2%, keeping the annual rate at 3.3%.

Wells Fargo economists warn that inflationary pressures may persist as disinflationary headwinds such as improving supply chains and falling commodity prices fade.

Meanwhile, the job market continues to defy expectations. December’s payroll data showed an impressive 256,000 new jobs, beating consensus forecasts.

A resilient labor market raises doubts that the Fed needs further easing as employment strength can sustain consumer spending and economic activity. But this also complicates the Fed’s task of balancing inflation control without triggering a sharp slowdown.

Adding to the puzzle, long-term Treasury yields climbed to 4.8%, the highest since late 2023. As Fidelity’s Jurrien Timmer notes, historically returns approaching 5% have coincided with stock market corrections.

The dollar index also rose to levels not seen since November 2022, causing the euro to fall in line with the dollar; This is a sign of tighter financial conditions that the Fed may already be doing some business with.

What does this mean for Bitcoin and the crypto market?

Bitcoin’s recent price decline – a 12.5% ​​drop from its all-time high of $108,268 on December 17, 2024 – points to broader risk aversion sentiment in financial markets.

If the January CPI report confirms stable inflation or resilient growth, the Fed could remain steady or signal a longer pause before additional easing. Additionally, increases in Treasury yields and a strong dollar often put pressure on global assets, including cryptocurrency, as they increase the relative cost of holding non-dollar-denominated investments.

All of these consequences could dampen Bitcoin’s recovery prospects as the crypto market thrives on expectations of easy monetary policy.

The crypto market’s recent behavior shows a high correlation with risk sentiment on Wall Street, where the Nasdaq fell 0.4% in the session on January 13; This reflects the caution reflected in Bitcoin’s price sentiment.