Core CPI below expectations, Fed's rate cut window opens, but political pressure is changing the game rules

The latest US CPI data releases send complex market signals. Inflation remains moderate overall, and core CPI is even below expectations, which should have opened the door for the Federal Reserve to cut interest rates. However, in the current political environment, the independence of monetary policy is facing unprecedented challenges, bringing new uncertainties to the crypto market.

The Double-Edged Nature of CPI Data

According to recent reports, the US Consumer Price Index (CPI) increased by 2.7% year-over-year, in line with market expectations. But more noteworthy is the core CPI, which rose by 2.6% YoY, below the expected 2.7%.

The performance of core CPI is especially important because it excludes volatile food and energy prices, providing a clearer reflection of the true inflation trend. The data being below expectations suggests that the US’s underlying inflation pressures are easing.

Reignition of Rate Cut Expectations

Against this backdrop, market expectations for a Fed rate cut will likely heat up again. The lower core CPI gives the Fed more policy space, reducing the need to maintain high interest rates to combat inflation. This is generally a bullish signal for risk assets, including cryptocurrencies—because a rate cut environment typically increases investors’ risk appetite.

The Dilemma of the Fed Under Political Pressure

But there is a key variable: Fed Chair Jerome Powell is facing a criminal investigation. According to recent reports, the US Department of Justice has threatened to bring criminal charges related to Powell’s Senate testimony last June. Powell responded that he is under investigation because the Fed’s interest rate decisions are based on economic assessments, not political will.

This reflects a deeper issue: the independence of the Fed is under threat. When a central bank chair faces criminal threats for sticking to independent policy judgments, it signals a fundamental challenge to the Fed’s institutional integrity. The key question moving forward is whether the Fed’s rate decisions will continue to be evidence-based or succumb to political influence.

Escalating Policy Uncertainty

This political pressure can directly impact the Fed’s decision-making process. Even if data supports a rate cut, Powell and his team may face additional political considerations when making decisions. Such uncertainty is problematic for markets, as investors need to be able to predict and rely on the central bank’s policy framework.

New Opportunities and Challenges for the Crypto Market

In this context, the crypto market faces a landscape of both opportunities and challenges.

Opportunities

• Rate Cut Expectations: If the Fed actually begins to cut rates, increased liquidity could boost risk asset valuations.
• Regulatory Shift: According to recent news, the CFTC is restructuring its Innovation Committee, with initial members coming from executives at Gemini, Kraken, Crypto.com, and other crypto firms. This indicates that regulators are engaging more actively in crypto industry dialogue, potentially signaling a more friendly regulatory environment.

Challenges

• Policy Uncertainty: The Fed’s independence is under threat, which could lead to an unstable policy framework.
• Complex Macro Environment: Geopolitical issues, fiscal policies, and other factors are influencing markets, making CPI data alone insufficient to determine market direction.

Key Focus Areas Moving Forward

Markets should closely monitor several key indicators:

• The Fed’s decision at the next policy meeting
• How the criminal investigation of Powell develops
• Progress in the CFTC Innovation Committee’s work
• The trajectory of upcoming CPI data, especially whether inflation continues to ease

Summary

This CPI data signals moderate inflation and the potential for an interest rate cut. However, given the current political environment, the reliability of this signal is questionable. The Fed is in a delicate position: economic data supports a rate cut, but political pressure calls for caution. For the crypto market, this creates both potential upside from rate cuts and risks from policy uncertainty. The key is to understand that the market is now not only trading economic data but also the stability of the institutional framework itself.