Inflation-Driving Factors: Why the Federal Reserve Is Reluctant to Cut Interest Rates

Bitcoin’s supporters’ optimism about a global rate cut faces serious challenges. Recent research from two leading economists reveals that the United States is facing inflationary pressures that will make monetary authorities more cautious in their rate reduction policies. Adam Posen of the Peterson Institute for International Economics and Peter R. Orszag of Lazard have published an analysis projecting U.S. inflation could surpass 4% this year, disappointing the hopes of crypto markets that have been relying on aggressive interest rate cut scenarios.

This projection is particularly important given its implications for risky assets, specifically Bitcoin which is currently trading at the $84.91K level with a decline of 5.19% in the last 24 hours. While the official inflation rate measured through the consumer price index has fallen to 2.7% by 2025, economists’ projections point to the opposite trend for the coming period.

Economic Factors Triggering Price Increases

Posen and Orszag’s research identified several crucial factors that can outweigh the productivity gains of artificial intelligence technology and lower housing costs. Economists emphasize that the impact of Trump’s tariffs on imports will cause importers to pass on the rising costs to the end consumer. While this delay mitigates the short-term spike in inflation, the cumulative impact could add 50 basis points to core inflation by mid-2026.

The second significant factor is the increasingly tight labor market conditions. Migrant deportation policies have the potential to create labor shortages in various sectors of the economy, drive wage increases and ultimately fuel inflationary pressures through increased demand. In addition, expanded government spending could push the U.S. fiscal deficit beyond 7% of GDP, combined with increasingly loose financial conditions, creating an environment that supports a general increase in the cost of living.

Implications for the Federal Reserve and Financial Markets

Higher inflation projections will make the Federal Reserve take a more conservative stance. Although some investment banks are forecasting a 50-75 basis point rate cut so far this year, Bitcoin proponents have anticipated a much more aggressive move. The fact that structural factors can keep inflation high means that the Fed will remain cautious in driving its monetary policy.

This paradox lies in the so-called “pursuit policy” scenario. When central banks are too conservative after periods of disinflation, they may have to make more abrupt and disruptive adjustments in the future. This creates uncertainty that is detrimental to risky assets such as stocks and cryptocurrencies.

Impact on Risk Assets and Bitcoin

This higher inflation projection coincides with a rise in global bond yields, including US Treasuries which hit a five-month high of 4.31% last week. This condition makes risky investments such as stocks and cryptocurrencies less attractive to investors. Bitcoin, which was expected to benefit from expansionary monetary policy, is instead experiencing selling pressure.

The latest data shows Bitcoin at the $84.91K level with a 5.19% decline in 24 hours, reflecting a more cautious market sentiment. This contrast is clearly visible compared to gold jumping above $5,500 an ounce, suggesting that investors looking for a store of value prefer traditional assets over cryptocurrencies.

The Gap in Expectations and Market Reality

The researchers emphasized that this inflation driver is more significant than the downward trend of price pressures that is the focus of the market consensus. While the decline in housing inflation continues and productivity increases, the combined impact of protectionist policies, a tight labor market, and a large fiscal deficit creates a more persistent inflation scenario.

The implications for the cryptocurrency community are clear: expectations about disinflation and aggressive interest rate cuts need to be recalibrated. The Federal Reserve will move more slowly and deliberately, giving risky assets a longer time to recover. This situation underscores the importance of understanding the broader macroeconomic dynamics when making investment decisions in the cryptocurrency market.