Bitcoin's Fate Hinges on Fed's Tightrope Walk

Bitcoin remained relatively stable as U.S. consumer price index (CPI) data for August aligned with expectations, offering mixed signals on inflation and economic momentum. While the release did not trigger significant volatility in the cryptocurrency market, it set the stage for continued speculation about Federal Reserve monetary policy decisions in the coming weeks. The CPI data showed core inflation at 3.1% year-over-year, a level that has kept the debate over potential rate cuts tightly contested among policymakers.

Markets are closely watching for any indication that the Fed might ease monetary policy in the near term. A 25 basis point rate cut is currently priced in at roughly 90% probability, according to CME Group's FedWatch tool, while some prediction markets suggest a slightly higher chance of a more aggressive 50 basis point cut. Traders on Polymarket, a prediction market platform, have allocated around 15% of their bets to the 50 basis point cut scenario, reflecting growing optimism that the Fed may respond to weakening labor and inflation data.

Labor data has added to the uncertainty, with recent revisions showing a significant downward adjustment of 911,000 jobs in the first quarter of 2025—the largest adjustment since 2009. This has raised concerns about the durability of the U.S. economic recovery. Meanwhile, core personal consumption expenditures (PCE), another key inflation gauge, stood at 2.9% in July, slightly below the core CPI reading but still within the range that complicates a clear path for rate cuts.

Despite the evolving economic landscape, market participants remain cautious. Treasury yields continue to reflect a nuanced outlook, with short-term instruments pricing in easing expectations and longer-term maturities remaining anchored by fiscal and term premium considerations. Reuters polling suggests that the yield curve is expected to steepen into year-end, with two-year yields projected near 3.40% and 10-year yields around 4.25%, producing a spread of approximately 85 basis points. Even after a potential 25 or 50 basis point cut, policy rates would still remain above the Cleveland Fed’s estimated neutral rate of 3.7%, underscoring the delicate balance the Fed must strike.

Bitcoin traders, meanwhile, remain on high alert for any policy shifts that could affect the dollar and real yields. The cryptocurrency briefly reached a high of $124,000 in mid-August amid expectations of Fed easing, and further movements will depend heavily on the central bank’s language and actions in the coming weeks. Upcoming economic releases, including the CPI report on September 11 and retail sales data on September 16, could tip the balance between a 25 and 50 basis point cut before the Fed meets.

In parallel with monetary policy developments, U.S. lawmakers have introduced new legislation that could further shape the institutional treatment of Bitcoin. Under HR 1566, the U.S. Treasury must report within 90 days on the feasibility of maintaining a strategic Bitcoin reserve. The bill requires a detailed assessment of custody, cybersecurity, and legal frameworks for managing a federal Bitcoin stockpile. This initiative is part of a broader legislative effort to establish a coherent digital asset policy, building on previous executive orders and proposed acts such as the BITCOIN Act. As the deadline approaches, market participants await clarity on how the government might treat Bitcoin as a strategic asset—potentially influencing broader market sentiment and institutional adoption.