Bitcoin, asset risk under short-term pressure as macro narrative turns

Bitcoin and other risk-enabled assets are under near-term pressure as the macro narrative moves from recession to sticky, entrenched inflation.

Sticky inflation

The markets are prepared for an impending recession. However, current macro analysis suggests that a recession may not be coming, at least not in the short term. Instead, analysts expect a period of steady, pegged inflation.

On February 24, the US Bureau of Economic Analysis (BEA) released personal consumption expenditures (PCE) data for January, showing an actual rate of 4.7%, much higher than the expected rate of 4.3%.

The PCE measures the price of goods and services, similar to the consumer price index (CPI), but differs by obtaining data from businesses as opposed to consumers, as is the case with the CPI.

Although year-over-year CPI data shows that inflation is slowing, thus conflicting with PCE data, the US labor market remains hot with unemployment at a 50-year low and wage growth rising – suggesting that there is still inflationary pressure.

The result of this is likely to be further hawkishness from the Fed, which stated that its primary goal is to get inflation down to 2%.

Should higher inflation in turn become the dominant narrative, the effect could see price pressure on Bitcoin and other risky assets, as disposable income is squeezed to keep pace with the price of necessities.

Fed funds rate rises

Futures data from the Fed Funds previously indicated increasing confidence in the interbank lending market. However, recent movements show that this narrative has turned.

Fed funds futures refer to derivatives based on the federal funds rate – the lending rate charged by banks (to other banks) for overnight lending.

The chart below shows Fed Funds futures for September 2023, December 2023 and December 2024 have adjusted higher. A higher interest rate across the board suggests that the banks lack confidence in lending to other banks – which means that interbank loans become more expensive.

Like persistent inflation, a higher rate from the Fed will put downward pressure on risky assets as banks cut back on lending to limit exposure.

Keep prices higher for longer

The interest paid on the federal government debt is approaching $1 trillion. The chart below shows almost a doubling of interest payments since 2020.

50% of 2022’s $1.5 trillion discretionary budget was spent on the military, with the second most significant portion, at 8%, allocated to Veterans’ Benefits totaling $115 billion.

Keeping interest rates higher for longer will make it harder to service existing debt – this puts the Fed in a difficult position when it comes to seeing things through to a 2% inflation rate.

The updated forecast terminal rate now comes in at 5.25%-5.50%, which gives a leeway of 75 basis points from the current rate.

The next FOMC meeting is scheduled to end on March 22. Currently, 70% of economists favor a 25 basis point increase, while the remaining 30% expect a 50 basis point increase.

Meanwhile, risk assets, including Bitcoin, now face short-term downward pressure as inflation and declining risk appetite among banks provide headwinds to price appreciation.