Bitcoin experienced a notable decline on Friday, falling below the $77,000 mark as remarks from Federal Reserve Governor Christopher Waller indicated a potential shift toward raising interest rates in the future. This change in sentiment from Waller prompted traders to price in a quarter-point Fed rate hike as early as the upcoming October meeting.
Over the past week, Bitcoin has witnessed a decline of approximately 4.5%, attributed to deteriorating macroeconomic conditions. As real yields increase and the dollar strengthens, demand for non-yielding assets like Bitcoin appears to be waning.
In a recent speech delivered in Frankfurt, Waller addressed the changing landscape of monetary policy, emphasizing the risks associated with persistent inflation. While he advocated for maintaining steady rates in the near term, he underscored that ongoing inflation might necessitate a different approach. Notably, Waller had previously supported a reduction in rates by 75 basis points by late 2025, reflecting a more dovish stance; however, his current comments signal a re-evaluation of that position.
“I can no longer rule out rate hikes further down the road if inflation does not abate soon,” Waller stated, adding that if inflation expectations indicate signs of being unanchored, the Fed may have to reconsider its approach.
In response to Waller’s comments, traders adjusted their expectations regarding the October 28 Federal Reserve meeting, with futures indicating a roughly 40% probability of a 25-basis-point rate increase. While a hold on rates still leads expectations at nearly 49%, the overall forward curve has shifted toward a more hawkish outlook.
This adjustment also aligns with warnings from investment firm PIMCO regarding the risk of a Fed hike, influenced by geopolitical tensions related to the Iran conflict and rising oil prices. Recent economic indicators show that the headline Consumer Price Index (CPI) rose by 0.6% in April, and core Personal Consumption Expenditures (PCE) inflation has reached around 3.3% year-over-year.
Consumer sentiment is also under pressure, highlighted by the University of Michigan index dropping to 44.2—its lowest since the series began in 1952. This decline includes a rise in one-year inflation expectations to 4.8%.
If the situation in the Middle East stabilizes and oil prices decrease, there is a possibility for the current hawkish market sentiment to unwind. However, if energy prices remain elevated, the Federal Open Market Committee (FOMC) may be compelled to respond accordingly, which could leave Bitcoin vulnerable to constraining conditions and continued inflation worries as the year progresses.
