Cooling US inflation could give Fed 'wiggle room to cut rates' and potentially boost risk assets, analysts say

Wednesday's cooler-than-expected U.S. consumer price index inflation reading could offer the Federal Reserve more flexibility to lower interest rates, potentially sparking a resurgence of risk-on sentiment that may benefit bitcoin, analysts say. The Federal Open Market Committee has kept the federal funds rate steady within the target range of 4.25% to 4.50% since December 2024. However, all eyes are now on the Fed’s upcoming monetary policy decision scheduled for March 19.

Monetary easing is generally favorable for risk assets, as it boosts liquidity within the financial system. Lower interest rates also diminish the appeal of fixed-income investments, prompting investors to seek higher returns in equities and further out the risk curve to digital assets like bitcoin.

Wednesday’s CPI release brought some relief to investors, with Core CPI for February rising just 0.2% month-on-month, falling short of the expected 0.3%. Bitwise Head of Research Europe André Dragosch highlighted how the latest cooling inflation print could result in a beneficial sentiment change for risk assets. "U.S. CPI inflation decelerating gives the Fed more wiggle room to cut rates, which is probably the reason why bitcoin is rallied on the release," Dragosch said.

Valentin Fournier, an analyst at BRN, echoed this sentiment: "This lower-than-expected inflation print strengthens the case for multiple rate cuts, as investors now price in an 82% chance of three cuts by December — a major potential liquidity boost for risk assets, including crypto."

Bitfinex analysts also emphasized how the inflation cooldown supports the case for rate cuts. "The recent cooling of U.S. inflation, with February’s CPI rising by just 0.2%, strengthens the case for potential Federal Reserve rate cuts. Trade war-induced economic strain could further pressure the Fed to act sooner, improving liquidity conditions for risk assets like Bitcoin. Lower interest rates generally support Bitcoin’s price by making it a more attractive store of value compared to yield-generating assets," they stated.

However, despite expectations of a positive market reaction, BIT Mining Chief Economist Dr. Youwei Yang warned that one favorable CPI print may not be enough to restore confidence. "CPI was bullish, signaling faster rate cuts, but crypto hasn't reacted strongly, as weeks of market fear require more than a single good print to regain confidence," Yang said.

Trump's tariffs add pressure

Yang also highlighted how the Trump administration’s aggressive tariff policies exacerbate economic challenges, potentially forcing the Fed’s hand.

"The real issue is Trump’s aggressive tariffs, which risk making inflation stickier while also crashing markets and triggering layoffs, particularly by the Department of Government Efficiency (DOGE)," Yang said. "This puts the Fed in a bind where high inflation from tariffs makes rate cuts harder, but the potential for market crashes and job losses pressure the Fed to cut rates sooner."

Nevertheless, Yang cautioned that premature rate cuts could reignite inflation, complicating future monetary policy. "Until clearer signals emerge, fear and uncertainty will weigh on crypto market sentiment," he added.

Bitcoin's correlation with equities

Bitfinex analysts noted that corrections within bull cycles are typical and may indicate a temporary shakeout rather than the onset of a prolonged bear market. "The broader market, especially equities and bond yields, will dictate bitcoin’s trajectory. If global liquidity conditions ease and institutional inflows persist, bitcoin’s support at $72,000–$75,000 could hold, potentially setting the stage for a resumed uptrend," they said.

Spot bitcoin exchange-traded funds  recorded net inflows of $13.3 million on Wednesday, breaking a five-day streak of outflows, according to data from Farside Investors. Notably, ARK Invest’s ETF saw strong inflows, hinting at institutional demand despite the recent market volatility.

"Bitcoin ETF flows have shown early signs of a turnaround, with a net inflow on March 12, breaking a five-day streak of outflows, with ARK Invest’s ETF seeing strong inflows, suggesting institutional demand remains intact despite short-term volatility," Bitfinex analysts said. "If inflows continue, it could indicate that fund managers are repositioning ahead of a more dovish Fed policy shift."

However, the analysts cautioned that a single day of inflows doesn’t necessarily signal a trend reversal but does suggest improving sentiment.

Bitcoin traded flat early Thursday, holding above $83,000 with intraday swings between a low of $80,625 and a high of $84,302. Despite this steadiness, the largest digital asset by market capitalization has dropped 15% over the past month.