CPI below expectations signals a potential interest rate cut, and the Federal Reserve's policy independence faces a test

The US December unadjusted CPI data has been released, signaling a relatively positive signal for the market. The data shows a CPI of 324.054, below the expected 324.115 and also lower than the previous value of 324.122, indicating that inflationary pressures are easing. In the context of Federal Reserve policy facing political interference and market valuations at historic highs, the significance of this data goes beyond the numbers themselves.

Market Implications of CPI Downward Trend

Gradual Easing of Inflationary Pressure

From the data, CPI has declined for two consecutive months. December’s 324.054 compared to November’s 324.122 shows a decrease and beats market expectations, suggesting that price increases are slowing down. For market participants who have been paying close attention to inflation trends, this is a positive signal.

Easing inflationary pressures generally mean the Federal Reserve has more room for policy maneuvers. If inflation continues to approach the target level, expectations for rate cuts will strengthen. This will support interest rate-sensitive assets—including cryptocurrencies.

Variables Affecting the Federal Reserve’s Policy Outlook

According to the latest news, Fed Chair Powell is under criminal investigation due to testimony before the Senate last June. More importantly, this involves issues surrounding the independence of Fed policy. Powell stated that the Fed’s rate decisions are based on economic assessments, not political will.

This political risk cannot be ignored. If Fed policy-making is influenced by political pressure, relying solely on CPI data to determine future policy directions will be insufficient. The market needs to evaluate both economic fundamentals and changes in the policy environment.

Risks in the Context of Market Valuations

Buffett Indicator Hits Record Highs

According to the latest data, the Buffett Indicator (US total market capitalization to GDP ratio) is currently around 223%-224%, with some data even approaching 230%. This exceeds the levels seen during the dot-com bubble in 2000 (about 150%) and the post-pandemic high in 2021.

In comparison, the long-term historical average of this indicator is around 80%-100%, with 100%-120% considered a reasonable valuation range. The current level is clearly overvalued. This means that even if CPI data improves, overall market risk is accumulating.

Micro Signals in the Cryptocurrency Market

Before and after the CPI data release, the crypto market showed divergence. XRP trading volume plummeted 58.41% within 24 hours to $1.1 billion, and the token may be forming a bearish pattern on the weekly chart. Meanwhile, the US spot XRP ETF experienced a net outflow of $40.8 million on January 7.

These micro signals suggest that market concerns about the macro environment may outweigh the optimism from a single data point.

Future Focus

Lower-than-expected CPI supports expectations for rate cuts, but political pressures on Fed independence and market valuations at historic highs will influence the final policy outcome.

In the short term, the market may continue to oscillate between “rate cut expectations driven by easing inflation” and “overvaluation risks.” As risk assets, cryptocurrencies will benefit from rate cut expectations but will also be pressured by overall risk asset valuation adjustments.

Summary

The US December CPI below expectations signals easing inflation, which should theoretically support rate cut expectations. However, the current market environment is more complex: the Fed faces political interference, US stock valuations are at historic highs, and profit-taking signs have appeared in the crypto market. This means that a single positive data point may not be enough to sustain a market rally. Investors need to pay attention to changes across macro policy, political risks, and market valuation dimensions.