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.
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.”
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'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.”
“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.”
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.
