Economists Signal a High Inflation-Low Interest Rate Environment
The US economy soared 4.3% quarter-on-quarter in Q3, up from 3.8% in Q2, with PCE prices rising 2.8% QoQ, compared with a 2.1% increase in Q2.
A robust economy and indications of sticky inflation signaled a more hawkish Fed policy stance. However, a cooling labor market and expectations of an incoming Fed Chair, favoring lower interest rates, kept rate cut hopes alive. According to the CME FedWatch Tool, the probability of a March cut has increased from 46.5% on November 26 to 53.3% on December 26.
Economists have speculated that the Fed may lower rates and tolerate a higher inflation backdrop. Grayscale’s Head of Research, Zach Pandl, recently commented on unsustainable government deficits and debt and potential Fed action, stating:
“One path is fiscal belt tightening. We could raise everybody’s taxes and cut the entitlement spending to get this thing under control. I see no evidence that we’re going down that path. The other option is we could monkey around with somewhat low interest rates and tolerate a bit of inflation over time to try to manage the symptoms.”
Pandl sees the second path as the most likely, believing that artificially low interest rates and above target inflation would drive demand for alternative stores of value, such as BTC.
Fed rate cuts would narrow the US-Japan rate differential. However, a lower BoJ neutral rate would likely keep yen carry trades profitable enough to drive demand for risk assets.
President Trump’s push for a Fed Chair supportive of lower interest rates aligns with Pandl’s outlook.
US BTC-Spot ETFs Extend Outflow Streak
Easing fears of a yen carry trade unwind and hopes for Fed rate cuts bolstered demand for BTC. However, the US BTC-spot ETF market extended its outflow streak to two consecutive weeks in the reporting week ending December 26, leaving BTC below $90,000.
According to Farside Investors, the US BTC-spot ETF market saw $589.4 million in weekly net outflows, after outflows of $497.1 million the previous week.
Key flow trends for the week included:
- iShares Bitcoin Trust (IBIT) had net outflows of $242.7 million.
- Fidelity Wise Origin Bitcoin Fund (FBTC) reported net inflows of $110.7 million.
- In total, eight of the 11 ETF issuers reported weekly outflows, with the remainder seeing zero net flows for the week.
Demand for US BTC-spot ETFs remains crucial for the supply-demand balance. Outflows for the week left BTC down 0.75% for the current week despite three days of gains.