Trump’s tariffs raise inflation forecasts, and the Fed could respond to this crisis with a policy that would help the crypto markets.
Although there are no certainties regarding this, it is necessary to take Waller’s statements seriously, because he is one of the most important members of the Board of Governors of the American central bank.
The rise of inflation in the USA: the Fed might satisfy the crypto market
Yesterday, the member of the Fed Board of Governors, Chris Waller, stated that Trump’s tariffs could bring inflation back near 5%.
Waller has hypothesized that inflation in the USA could rise again to almost 5% this year. He also said that economic growth could slow down, again due to tariffs.
The member of the Board of Governors of the Fed has, however, considered two slightly different hypothetical scenarios, even though both are only hypothetical as of today.
The first is the one that hypothesizes that average tariffs on goods imported from the USA remain at 25%, while the second is that they are brought to 10%.
Such hypotheses serve to begin imagining how the Fed itself must respond to the aggressive foreign trade policy of President Trump, defined as “one of the biggest shocks that have hit the US economy in many decades”.
If the average tariffs were to remain at 25%, Waller predicts a significant increase in the unemployment rate, and a noticeable rise in prices that would even end up reducing the spending of Americans.
Furthermore, in the event of a significant slowdown, it hypothesizes that this could threaten the arrival of a recession.
In this scenario, Waller sees inflation reaching a peak close to 5% in the coming months, assuming that if the tariffs imposed by Trump were only partially passed on to consumers, inflation could still rise to about 4%.
In the second scenario, Waller hypothesizes an inflation around 3%, with growth penalized but less than in the first scenario.
The consequences of rising inflation on the Fed and the crypto markets
In the first case, the significant increase in the unemployment rate would lead the Fed to cut rates earlier and more significantly than previous forecasts.
This hypothetical easing of the Fed’s restrictive monetary policy could benefit financial markets, including crypto ones, but on the other hand, it could end up further increasing inflation.
Instead, in the second scenario, the Fed could simply wait and see how the economy evolves before intervening.
Waller, however, emphasizes that a surge in inflation related to tariffs could actually be only temporary, making the main problem become growth and employment, thus pushing the Fed to intervene on rates.
It should be remembered that the reduction of interest rates is one of the main objectives of Trump, since lower rates also mean lower interest paid by the American State on the debt it will issue during 2025.
The effects on the U.S. economy
Waller did not deny that it is also possible that the effects on the economy may be more persistent.
So, on one hand, there are more strictly financial considerations, which could lead to pessimistic but not overly so scenarios, while on the other hand, there are economic considerations that could instead lead to rather pessimistic scenarios.
In the end, it is possible that the negative effects on the economy will also be reflected in price changes, making them more lasting rather than temporary.
Even the President of the New York Fed, John Williams, has revised downward his forecasts for the U.S. economy and raised his expectations regarding inflation.
According to Williams, this year economic growth will slow down to below 1%, with inflation between 3.5% and 4% and an unemployment rate at 5%.
The effects on crypto
In such a scenario, therefore, the probabilities that the Fed will cut rates significantly this year seem to increase.
At this moment, the markets estimate four cuts of 25 basis points by the end of the year, and this in the medium/short term could benefit the financial markets, and in particular the crypto ones.
Furthermore, the Dollar Index seems to be heading towards a continuation of the decline that began at the end of January, and this could significantly help the price of Bitcoin.
If BTC were to restart, it would most likely bring the entire crypto market with it, even though the escape from risk-on that began a few weeks ago needs to end first.
To tell the truth, in recent days this escape seems to have significantly reduced, with a ratio between the price of a BTC and that of an ounce of gold dropping from 36 times at the beginning of February to the current 26 times.
In the short term, however, the VIX index remains very high, around 30 points, but significantly lower compared to the 50 points of last Tuesday.
It remains possible that the Fed’s monetary policy over the coming months may become less restrictive, and this could be the perfect trigger for a positive second half of 2025 for the crypto markets.