Bitcoin, Ethereum Dip as Inflation Figures Hamstring Rate Cut Hopes

Bitcoin and Ethereum turned slightly lower Thursday, sinking 1% each immediately after a key federal economic report indicated that the U.S. economy grew slower than expected in the first quarter. 

The Bureau of Economic Analysis (BEA) said Thursday that the nation’s gross domestic product (GDP) expanded at an annualized pace of 1.6% early this year, well below economists’ expectations of 2.2% growth. The slowdown followed six straight increases in GDP of more than 2% per quarter.

Muted exports and less inventory stockpiles offset a jump in residential construction and increased consumer spending, the report states. Thursday’s soft GDP reading follows annualized growth of 3.4% late last year.

Meanwhile, the price of Bitcoin and Ethereum had fallen slightly over the past day, to $64,690 and $3,160, respectively, according to data from CoinGecko. On Wall Street, the S&P 500 had similarly fallen nearly 1% as of this writing.

“The headline [GDP] number sort of gives a false signal,” Sam Bullard, Senior Economist at Wells Fargo, told Decrypt. “When you take out the volatile numbers, the underlying momentum of the U.S. economy seems to be still progressing at a fairly brisk pace.”

For example, final sales to private domestic purchasers grew 3.1% in the first quarter, Bullard said. Pulling out changes to GDP from inventories, net exports, and the government, the measure better reflects strength in the economy’s underlying domestic demand, he added.

However, the GDP report indicated that core Personal Consumption Expenditures (PCE), the Federal Reserve’s preferred inflation gauge, grew 3.7% in the first quarter. Up from 2% in fourth-quarter 2023, that could influence the Fed’s path forward on rate cuts, Bullard said.

To tame a decades-high bout of inflation, the U.S. central bank has ratcheted interest rates to a 23-year high and held them there for months. While higher interest rates can slow a red-hot economy through increased borrowing costs, they can also weigh on risk assets like stocks and crypto as assets like bonds or cash become more attractive.

Shifting expectations on rate cuts alongside elevated geopolitical tensions in the Middle East have dented risk assets this month, including Bitcoin. And on Thursday, expectations that the Fed will hold interest rates steady in May solidified to 90% from 83% a day before, according to the CME Group’s FedWatch Tool.

“Seeing a pickup in [core PCE] is consistent with the extended resiliency we’re seeing in the U.S. economy on the demand side,” Bullard said. “This keeps the Fed on the sidelines in regards to that timing of that first rate cut.”

Edited by Ryan Ozawa.