Bitcoin: Inflation Hedge No Matter Fed Rate Decision

Bitcoin's Position: A Win-Win Inflation Scenario

Regardless of whether the Federal Reserve delays or confirms interest rate cuts, Bitcoin is poised to benefit. President Trump's fiscal policies are setting the stage for potential inflation, creating an environment where Bitcoin's value as a hedge solidifies.

Key takeaways:

• Trump's push for rate cuts risks surging inflation, a weaker dollar, and bond market instability.
• Trade policy and fiscal expansion are independently driving prices higher.
• Bitcoin is positioned to gain as both a rapid-cut inflation hedge and a slow-burn store of value against eroding US macro credibility.

Economic stress is apparent despite reported growth. The dollar is down over 10% since January, core PCE inflation remains at 2.8%, and the July PPI exceeded expectations, surging 0.9%. The 10-year Treasury yield's stability at 4.33% is questionable given the $37 trillion debt.

Trump's Influence and the Fed's Dilemma

Trump is urging the Fed to slash rates by 300 basis points to 1.25-1.5%. Compliance could flood the economy with cheap money, boosting risk assets and accelerating inflation. Resistance, however, won't prevent rising tariffs and the fiscal impact of the Big Beautiful Bill from pushing inflation higher.

Scenario 1: Aggressive Rate Cuts

If the Fed yields to political pressure, expect rapid consequences.

• Core PCE inflation could exceed 4% by 2026.
• The dollar's decline could intensify, potentially driving the DXY below 90.
• Treasury yields could briefly fall to 4% before surging past 5.5% due to rising inflation expectations.
• Interest payments on US debt might rise to $2 trillion (6% of GDP) by 2026, potentially triggering a debt crisis.

The politicization of the Fed poses a significant risk. Loss of market confidence in the independence of US monetary policy could ensue should Trump replace Powell with a more compliant chair. Examples like Turkey, where central bank purges led to market collapse and high inflation, serve as cautionary tales.

Scenario 2: Holding Steady

Maintaining current policy rates may appear responsible but won't prevent inflation.

• Tariffs are already contributing to price increases, as evidenced by rising input prices in the S&P Global surveys.
• The Big Beautiful Bill's combination of increased spending and tax cuts is expected to destabilize public finances, according to the IMF.
• Even without rate cuts, core PCE inflation could reach 3.0–3.2%.
• 10-year Treasury yields may gradually climb to 4.7% by next summer.
• Debt servicing costs may rise to $1.6 trillion (4.5% of GDP).
• The DXY could continue its decline, potentially reaching 91 by mid-2026.

Internal divisions within the FOMC regarding tariffs could weaken the Fed’s resolve in fighting inflation.

Bitcoin's Macro Impact

In the high inflation, collapsing dollar scenario, Bitcoin would likely surge alongside stocks and gold. Negative real interest rates and questionable Fed independence would elevate crypto as a preferred store of value.

In a more measured outcome, Bitcoin's rally might be slower, trading sideways until inflation expectations align with reality. However, as the dollar weakens and deficits grow, non-sovereign assets will gradually gain appeal. Bitcoin's value will solidify as a hedge against systemic risk, rather than simply as a tech bet.

Whether the Fed cuts rates or stands firm, the US faces inflationary pressures due to Trump's fiscal stimulus and trade policies. This challenging environment may favor Bitcoin as a resilient alternative.