Fed Clears Banks to Serve Crypto Firms Amid Inflation Fight

Federal Reserve Chair Jerome Powell confirmed that U.S. banks are free to provide services to crypto firms, marking a significant policy clarification that removes a key barrier for traditional financial institutions. This statement, made during congressional testimony, underscores the Fed’s stance on not inhibiting crypto banking relationships. Powell’s remarks echo his previous testimony in February, where he confirmed that existing supervisory frameworks permit banks to handle crypto as long as they understand and manage the associated risks.

Powell’s confirmation comes at a time when the Fed is engaged in a tough fight against inflation. While inflation has decreased from its 2022 peak, it remains above the central bank’s 2% target. Core personal consumption expenditures rose 2.6% in May, and near-term inflation expectations are increasing. This shift is partly driven by the renewed threat of higher tariffs, which are expected to raise consumer prices and potentially reduce business activity. Powell admitted that the Fed’s current policy is shaped by inflation projections for 2025, with both internal forecasts and external market expectations suggesting prices will rise faster next year. As a result, interest rate cuts are off the table for now, and the central bank will likely continue expanding its balance sheet, further weakening the purchasing power of the U.S. dollar.

Turning to the jobs market, Powell described it as healthy but showing signs of cooling down. The U.S. has added an average of 124,000 jobs per month this year, with the unemployment rate holding at a low 4.2%. However, the pace of hiring and wage growth has moderated, signaling a shift from the red-hot market of previous years. Powell assured lawmakers that the Fed remains focused on its dual mandate of maximum employment and stable prices, but he reiterated the difficult balancing act this requires. Fighting inflation too aggressively could stall the job market, while doing too little could allow inflation to become a permanent feature of the economy.

One of the biggest uncertainties complicating the Fed’s strategy is the unpredictable nature of trade policy. Powell explained that a rush by businesses to accelerate imports early in 2025 to get ahead of potential tariffs has skewed recent GDP figures, making it much harder to get a clear read on the economy’s true strength. Market-based measures of inflation expectations have been rising since April, reflecting growing concern among investors that the Fed’s current policy might not be enough to tame inflation in the long run. Given this murky outlook, Powell said the central bank will stick to its “wait-and-see” approach and assess more data before making any decisive moves.

Historically, favorable regulations increase institutional entry into crypto markets. This trend is anticipated to continue, particularly benefiting major cryptocurrencies. The decision promotes a conducive environment for broader financial institutional adoption. Regulatory shifts, akin to OCC's past guidance, are likely to bolster the industry's maturation. Previous similar stances led to increased capital inflows and market confidence. The potential for evolved banking relationships exists, suggesting imminent growth opportunities in this space. This will encourage deeper institutional adoption of crypto services and potentially unlock new sources of funding and capital entry into the crypto markets.