Bank of America economists suggest the Federal Reserve could raise interest rates due to surging energy costs from the ongoing war in Iran, despite cuts being more likely. Higher oil prices threaten to spread as inflationary pressures across shipping and materials. Experts warn a rate hike would initially pressure Bitcoin and stocks, but the cryptocurrency could later benefit as a hedge against currency debasement, similar to gold.
U.S. President Donald Trump is pressuring the Federal Reserve to lower interest rates. Bank of America economists raised the opposite possibility on Friday amid the war in Iran.
While still viewing cuts as more likely, the group outlined conditions for a rate hike. These include prolonged leadership by Chair Jerome Powell, unemployment under 4.5%, and energy price pressures spreading economy-wide.
Bitcoin traded below $70,000 after reaching a 45-day high of $75,600 earlier in the week. James Butterfill, head of research at CoinShares, said risk assets would face short-term pressure if the Fed hiked rates.
“The initial reaction to Bitcoin would not be great,” he said. “But I think it would actually turn around and do quite well as people realize we could easily be in a stagflation environment.”
This could mirror the conditions that led BlackRock CEO Larry Fink to highlight crypto and gold as “assets of fear” last October. Gerry O’Shea of Hashdex argued macroeconomic headwinds are unlikely to slow institutional Bitcoin adoption.
West Texas Intermediate oil was near $109 per barrel after surging as high as $116 since the conflict began. Bank of America economists wrote that a sustained oil price between $80 and $100 per barrel could increase hike likelihood.
On the prediction market Myriad, traders foresaw a 67% chance Brent crude would reach $120 per barrel. They also penciled in just an 11% chance of a U.S. ceasefire with Iran by month’s end.
Zach Pandl, head of research at Grayscale, stated, “We are still a long way off from Fed rate hikes.” He said officials would likely consider the oil price spike transitory unless it fed into long-term inflation expectations.
Bank of America noted core inflation is already high at 2.8%, above the Fed’s 2% target for nearly five years. They also warned of broader supply disruptions as shipping costs for fertilizer and aluminum surge.
Powell’s term is set to end in May, but he indicated he would stay until successor Kevin Warsh is confirmed. The economists noted Powell “isn’t nearly as dovish” as Warsh, bolstering the possibility of a hike.
