In brief
- While Bank of America economists still view rate cuts as the most likely path, they outlined how surging energy costs could force the Federal Reserve to hike.
- Beyond oil, rising shipping costs for fertilizer and aluminum threaten to spark broader price pressures in the U.S. economy, they noted.
- Experts warned that a surprise rate hike would initially pressure crypto and stocks, but the digital asset could later thrive as currency debasement hedge like gold.
U.S. President Donald Trump is putting intense pressure on the Federal Reserve to lower its benchmark interest rate. But as his war in Iran presses toward its fourth week, Bank of America economists raised the prospect of a policy move on Friday that’s in the opposite direction.
Although the group still views cuts as more likely than hikes, it outlined conditions under which the U.S. central bank would likely determine that tighter monetary policy is appropriate, amid surging energy costs and no end in sight to the conflict rattling the Middle East.
The economists wrote in a note that the likelihood of a hike would increase if Fed Chair Jerome Powell’s tenure at the central bank’s helm runs longer than expected, the unemployment rate remains below 4.5%, and price pressures from higher energy costs spread to other parts of the economy.
The assessment came as Bitcoin changed hands below $70,000, according to CoinGecko. Earlier this week, the digital asset touched a 45-day high of $75,600, after dropping as low as $63,000 on the day that the U.S.-Israel war with Iran broke out.
So-called risk assets, including stocks and crypto, would likely face short-term pressure in the unlikely event that the Fed raises interest rates following a series of cuts last year, James Butterfill, head of research at crypto asset manager CoinShares, told Decrypt.
Since Powell said on Wednesday that it was “too soon to know” how the war would affect the economy, Butterfill noted that exchange-traded funds tied to crypto have posted consecutive days of outflows, a potential preview of what a rate hike could bring.
“The initial reaction to Bitcoin would not be great,” he said. “But I think it would actually turn around and do quite well as people realize we could easily be in a stagflation environment.”
In some ways, a combination of high inflation, stagnant economic growth, and high unemployment would mirror the currency debasement and financial security concerns that led BlackRock CEO Larry Fink to highlight crypto and gold as “assets of fear” in October.
The sentiment was echoed by Gerry O’Shea, head of global markets insights at crypto asset manager Hashdex, who argued that macroeconomic headwinds for Bitcoin are unlikely to slow the pace of its adoption among institutional investors allocating on behalf of clients.
“You have a lot of investment advisors who have been doing their due diligence,” he said. “Given their mandate, they’re seeing this as an opportunity to get their clients exposure.”
‘Uncomfortably high’
On Friday, West Texas Intermediate oil edged down to $109 per barrel, Trading Economics data showed. Since the conflict in Iran upended global energy markets, via restrictions on key corridors like the Strait of Hormuz, the U.S. benchmark has jumped as high as $116 per barrel.
Bank of America economists wrote that rate hike conditions would most likely be met “if the Iran shock is sustained but moderate,” describing $80 to $100 per barrel as a “sweet spot.”
On Myriad, a prediction market owned by Decrypt parent company DASTAN, traders foresaw a 67% chance on Friday that Brent crude, the international benchmark, would pump to $120 per barrel before dumping to $55 per barrel. What’s more, they penciled in an 11% chance of the U.S. reaching a ceasefire with Iran by the end of this month.
The bank’s economists are among those still forecasting two 25-basis-point cuts this year, yet traders are currently holding their breath until mid-2027, per CME FedWatch.
“We are still a long way off from Fed rate hikes,” Zach Pandl, head of research at crypto asset manager Grayscale, told Decrypt. “Unless the increase in oil prices starts to feed into longer-term inflation expectations, Fed officials will likely consider it transitory.”
Indeed, the Fed’s framework typically “looks through” volatile food and energy costs, while focusing on so-called core goods and services. Bank of America economists noted that input costs for these sectors could rise as a result of higher energy prices, but they also raised the prospect of a broader supply disruption, with shipping costs for fertilizer and aluminum also surging.
They added that “core inflation is already uncomfortably high,” with the Fed’s preferred inflation gauge showing a 2.8% increase in January compared to a year earlier. That measure has run above the Fed’s 2% target for nearly five years.
Bitcoin has tumbled far from its all-time highs of $126,000 last year, leading Pandl to attribute the digital asset’s recent outperformance compared to gold and stocks to recovering sentiment and broader industry trends.
“Bitcoin has traded remarkably well since the start of the war with Iran,” he said. “We think this reflects oversold conditions and continued positive fundamental news related to stablecoins and tokenization.”
Powell’s term as chair is slated to end in May. But on Wednesday, he indicated that he would continue to serve in his current capacity until his successor, former Fed governor Kevin Warsh, is confirmed by the U.S. Senate.
Bank of America economists noted that Powell “isn’t nearly as dovish” as Warsh is likely to be, bolstering the possibility of a hike. “This is important because we view June as the earliest meeting at which the Fed can start to hike rates,” they added.
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Source: https://decrypt.co/361919/what-happens-bitcoin-bank-america-conditions-fed-rate-hikes-hit
