Key conclusions
- U.S. PCE inflation hit an annualized rate of 3.8% in April, twice the Federal Reserve’s official target.
- The new head of the Fed, Kevin Warsh, signals the maintenance of restrictive monetary policy, which drastically limits market liquidity.
- Bitcoin fell to around $73,000 in response to capital outflows from spot ETFs.
The consumer price index increased by 3.8% year-on-year in April, and the core index remained at 3.3%. The American central bank bases its decisions on the PCE inflation index (Personal Consumption Expenditures – a measure of changes in prices of goods and services purchased by consumers, taking into account changes in their behavior and the choice of cheaper substitutes). This data directly hit the cryptocurrency market. A few hours after the publication of the report, Bitcoin fell to the area of $73,300 and maintained this level over the weekend.
Warsh is known for his hawkish approach to monetary policy and his desire to reduce the central bank’s balance sheet. Investors sold cryptocurrencies already in the spring, when the chances of his nomination were increasing. The high reading of 3.8% gives the new president a strong argument for maintaining high interest rates.
Why PCE inflation dictates conditions in the cryptocurrency market
Bitcoin is extremely sensitive to global liquidity conditions, which are shaped by the US Federal Reserve. The mechanism is direct. Higher inflation reduces the likelihood of interest rate cuts in the US, which automatically keeps real bond yields high and strengthens the dollar. In such conditions, institutional investors give up high-risk assets in favor of instruments generating stable, safe income.
Massive capital outflow from ETF funds and pressure on the oil market
The macroeconomic consequences are clearly visible in the behavior of US spot ETFs. The data shows that these funds recorded the ninth consecutive day of capital outflow. In just one day, investors withdrew $229 million, of which the IBIT fund managed by BlackRock lost $178 million. In total, almost $2.7 billion flowed from Bitcoin and Ethereum-based products in two weeks.
These outflows are testing the resolve of institutions that entered the cryptocurrency market after the launch of ETFs, including Morgan Stanley clients that hold shares in the MSBT fund. As institutional demand dries up while the Fed tightens policy, investors take advantage of local price rebounds to take profits and flee to safer Treasuries.
Oil prices remain an additional risk factor. Tensions in the Strait of Hormuz area keep energy prices high, which prevents a quick return to price stabilization in the US.
The next government report will be released on June 25. Investors will then assess whether core PCE inflation begins to decelerate. Until then, consumers’ situation is made worse by falling incomes. In April, Americans’ real disposable income fell by 0.5% and the savings rate shrank to 2.6%. Morgan Stanley economists point out that Americans are starting to finance current consumption from savings. The head of the Fed has full support not to lower interest rates, which blocks bitcoin’s growth.
