The Federal Reserve faces an inflation dilemma: changing expectations of rate cuts, with market focus shifting to the new chairman candidate

The Federal Reserve’s interest rates are approaching a neutral level, but inflation stickiness issues are becoming more complex. This week’s FOMC meeting will announce the interest rate decision, with markets generally expecting no change. However, new factors such as the AI boom and rising metal prices may strengthen inflationary pressures, and Wall Street’s divergence on the timing of rate cuts is also intensifying. Meanwhile, the nomination of the new Federal Reserve Chair may be announced this week, becoming a new focal point for market attention. The crypto market faces pressure from multiple macro risks, but institutional investors’ willingness to allocate remains intact.

The Fed Faces a Dilemma of Moving Forward or Backward

According to the latest news, the current federal funds rate target range of 3.5%-3.75% is very close to a neutral level, indicating that policy stance has shifted from clearly hawkish to relatively balanced. Rushabh Amin, Portfolio Manager at Allspring Global Investments’ Cross-Asset Solutions team, pointed out that the current interest rate level will not further exacerbate inflationary pressures.

However, this seemingly “appropriate” policy stance faces new challenges. Diane Swonk, Chief US Economist at HSBC, stated that the Fed is in a “dilemma”—on one hand, inflation remains stubborn, and on the other, there appears to be no income growth to help strengthen the labor market. This contradictory situation is reshaping market expectations for future Fed actions.

New Variables in Inflation Stickiness

Breaking news indicates that the AI boom and rising metal prices may enhance inflation stickiness. This means that beyond traditional inflation pressures (such as energy and food), new drivers of price increases are emerging. The growth in demand for AI chips and data center infrastructure could push up related costs, while rising metal prices impact a broad range of manufacturing sectors. These factors make inflation more complex and harder to predict.

Wall Street economists have differing views on this. Sarah House, Senior Economist at Wells Fargo, believes that “the longer they wait to cut rates, the higher the threshold becomes for economic justification of further easing.” This suggests that economists’ confidence in rapid rate cuts is waning.

Wall Street Diverges on the Path of Rate Cuts

According to reports, expectations among Wall Street economists for further Fed rate cuts are waning, with markets expecting no action until July. This contrasts sharply with the widespread anticipation of rapid rate cuts earlier this year.

Stifel Chief Economist Lindsey Piegza noted that there are divisions within the Fed, with some officials worried about weak hiring momentum and others still concerned about persistent high prices. At least some officials are worried that any further easing could accelerate inflation.

Market Focus Shifts to the New Chair Nomination

Latest reports suggest that the Fed Chair nomination may be announced this week. US Treasury Secretary Janet Yellen indicated that the new Fed Chair could be announced as early as this week. Market attention is gradually shifting toward this significant personnel appointment, with investors generally expecting the new Chair to be more inclined toward rate cuts.

Polymarket data shows that the probability of BlackRock’s Global Fixed Income CIO Rieder becoming Fed Chair is close to 50%, while former Board Member Kevin Warsh’s probability has fallen to 28%. The policy stance of the new Chair could reshape market expectations for future monetary policy paths.

Crypto Market Faces Multiple Pressures but Institutional Attitudes Remain Steady

This week’s Fed rate decision has triggered increased volatility in the crypto markets. According to reports, currently, Bitcoin’s short-term implied volatility exceeds 45%, ETH’s short-term implied volatility reaches 63%, and SOL’s short-term implied volatility also exceeds 60%. The one-week implied volatility has increased by over 10% compared to the same period last week.

Bitcoin’s price performance also reflects market uncertainty. This month, Bitcoin’s gains have been fully retraced, falling about 10.9% from the January 14 high of $97,000. Year-to-date, the return is approximately -0.5%. From the October high of $126,000, Bitcoin has retreated over 30%.

Institutional Investors’ Allocation Willingness

Despite market pressures, Coinbase’s survey shows that institutional investors’ attitudes remain relatively stable. About 71% of institutional investors and 60% of independent investors believe Bitcoin is undervalued in the $85,000 to $95,000 range. More importantly, 80% of institutional investors said they would continue to hold or buy on dips if the market drops another 10%. This indicates that institutional confidence in crypto assets remains intact.

According to reports, under pressure from multiple macro risks—including Trump’s tariffs threat against Canada, US government shutdown risks, and geopolitical tensions—the crypto derivatives market has adopted a defensive posture. Put skewness and implied volatility have both increased, with significant fund flows shifting long-term put positions to lower strike prices.

Summary

The Fed is at a critical policy turning point. Interest rates are near neutral, but new sources of inflationary pressure (AI boom, rising metals) make rapid rate cuts more difficult. Divergence among Wall Street economists reflects market uncertainty about future policy paths, with the timing of rate cuts being pushed back.

This week’s Fed rate decision and the new Chair nomination will be key market events. While markets expect no change in rates, Powell’s guidance and the new Chair’s appointment could reshape investor expectations. Although the crypto market faces short-term pressures, institutional investors’ willingness to allocate remains, providing support for subsequent market stability. The key is to observe the new Chair’s stance on rate cuts and whether inflation stickiness eases.