The Fed Decides Not to Cut Interest Rates? Quick Look at PPI, CPI Surprise Rebound and Its Impact on the Crypto Market

In January, wholesale prices in the U.S. increased, with food and energy costs rising. According to the Producer Price Index (PPI) and Consumer Price Index (CPI) data for January 2025 released by the Bureau of Labor Statistics last week, the month-over-month PPI growth rate rose to 0.4%, lower than the revised previous value of 0.5%, but higher than the expected 0.3%. The year-over-year growth rate rose to 3.5%, exceeding the market's expectation of 3.2%, marking the largest increase since February 2023. The core PPI rose by 0.3% month-over-month and 3.6% year-over-year. The CPI increased by 3.0% year-over-year, compared to the previous value of 2.9% and the market expectation of 2.9%. The core CPI increased by 3.3% year-over-year, compared to the previous 3.2% and the market expectation of 3.1%.

Both CPI and PPI exceeded expectations, with the food inflation rate expanding and the energy inflation rate declining. The CPI has rebounded for four consecutive months, indicating a strong risk of inflation rebound. The additional inflation risk brought by Trump's tariffs could lead to a second wave of inflation. Therefore, it can be assumed that until inflationary pressures ease, a slowdown in the rate and magnitude of interest rate cuts is likely until the end of the year.

How to Interpret Recent CPI and PPI Data?

According to Powell's monetary policy report submitted to Congress, it elaborates on the Fed's views on interest rates, inflation, employment, the economy over the past year, and the Fed mainly focuses on the PCE index. When assessing the inflation outlook, it primarily considers core goods, housing services, and core non-housing services. Powell made it clear in his February 11 speech about the Fed's pace of rate adjustments, stating, "If the economy remains strong and inflation does not sustainably return to 2%, we can maintain the current policy constraints for a longer period."

The remarkably high inflation data on February 12 has laid the foundation for this stance. From an inflation perspective, rate cuts before the middle of the year need not be considered. According to detailed data, the decline in core goods expanded, reducing inflationary pressures, with the persistent inflation point still being core non-housing services.

Wall Street traders have now pushed the expectation of the next rate cut to December this year. One point to note is that the January wildfires in Los Angeles may impact the market's pricing of inflation. The significant part of the current market concerns about inflation rebound stems from the four consecutive months of inflation rebound. The CPI increase caused by wildfires is to some extent a systemic risk event. After excluding the wildfire conditions, it may not necessarily lead to the conclusion of a four-month consecutive rebound. Looking at the Trump administration's ongoing efforts to end the Russia-Ukraine conflict, a swift resolution to the conflict may lead to a decline in building materials, energy prices, and agricultural product prices to reduce inflation. It is highly likely that future data will gradually reverse pessimistic expectations, increasing expectations for the number and magnitude of rate cuts.

Transmission Mechanism of Inflation, Employment, and Interest Rate Reduction

Powell: "Our key focus on whether to lower interest rates should continue to be on controlling inflation and promoting employment."

The Consumer Price Index (CPI) is a macroeconomic indicator that measures the level of price changes of goods and services consumed by residents. It reflects the degree of inflation or deflation by statistically analyzing the changes in the prices of a representative basket of goods and services. When the CPI continues to rise, it means that consumers need to pay more money for the same amount of goods and services, which is usually seen as a signal of inflation. On the other hand, the Producer Price Index (PPI) mainly measures the trend and extent of changes in industrial enterprise product prices. The changes in PPI will affect CPI because changes in producer costs will gradually transmit to the consumer end through the industry chain.

Generally, moderate inflation has a certain stimulating effect on the economy. However, if inflation is too high, it will affect economic stability and residents' living standards. When the inflation rate is below the target level and shows a sustained downward trend, it may imply insufficient economic growth. At this time, it may be necessary to stimulate the economy by lowering interest rates to increase inflation expectations and bring inflation back to a reasonable range. However, if inflation is at a higher level, the central bank usually adopts a contractionary monetary policy such as raising interest rates to curb inflation.

Non-farm payroll data reflects changes in employment numbers in industries other than the agricultural sector. An increase in this data indicates that companies are expanding production or business and need to hire more labor, meaning that the job market is thriving, and the overall employment situation is improving. The unemployment rate refers to the ratio of the unemployed population to the labor force.

When the job market performs poorly, such as with a high unemployment rate and continuous sluggish non-farm payroll data, economic growth may be hindered. To stimulate the economy and increase job opportunities, a monetary policy like interest rate reduction may be adopted to lower business financing costs, encourage companies to expand investment and production, and thus create more job opportunities.

Does BTC Have Other Upside Logic?

According to a report on February 13, the U.S. federal budget deficit expanded to a record $840 billion in the first four months of this fiscal year. Also, on February 14, Dalio publicly stated: The U.S. must reduce the budget deficit from 7.5% of GDP to 3%, otherwise it will enter a debt death spiral. Currently, the U.S. is like a patient on the verge of a heart attack in need of emergency intervention.

Currently, the harbinger of a U.S. debt crisis has emerged. With a debt scale exceeding $36 trillion, interest payments already account for 4% of the annual GDP, 22% of annual fiscal revenue, and nearly a quarter of government revenue need to be used to pay interest. From this perspective, if the Federal Reserve continues to maintain high-interest rates, the risk of a debt crisis explosion will increase. It is more likely that, ignoring the turmoil in the macro environment, abandoning short-term policy opportunities, the key contradiction—debt crisis, would lead to interest rate cuts and easing.

Aside from the macro interest rate cut narrative injecting liquidity into the risk markets, another very important narrative for the Crypto market is the incorporation of BTC into strategic reserves, not only at a national level but also at a state treasury level. This means that if this reserve is approved, state treasuries will directly purchase BTC, amounting to a total purchasing power of 250,000 BTC. This implies that almost 1% of BTC's liquidity will be locked up, bringing about an inspiring sentiment and a reduction in supply effect that may once again fuel a cryptocurrency market bull run.