Expected Inflation: How Will It Change Bitcoin and Federal Reserve Strategy

The latest projections from two renowned economists bring an unexpected alert to the market—The United States may face inflation exceeding 4% this year, a departure from the expectations of a soft landing scenario. Adam Posen of the Peterson Institute for International Economics and Peter R. Orszag, president of the global financial advisory firm Lazard, have released a new study showing greater upward pressure on prices than initially anticipated by markets and crypto investors.

The unexpected rise in inflation risk directly responds to the optimism of Bitcoin bulls expecting sustained disinflation and faster interest rate cuts from the Federal Reserve. If prices continue to rise, it could allow the central bank to remain cautious in monetary policy adjustments—a scenario that would pose a significant obstacle for risk assets like cryptocurrencies.

Factors That Could Lead to Unexpected Inflation

According to Posen and Orszag’s analysis, several structural factors are converging to cause higher prices this year. The Trump administration’s tariff policy is a major concern—importers typically pass additional costs onto consumers, creating a “price pass-through” effect that may not be immediately visible but will become significant mid-year.

Economists project that by Q2 2026, the delayed pricing effects from tariffs will be nearly fully realized, potentially adding 50 basis points to headline inflation. Additionally, stricter labor market conditions, potential mass deportations leading to worker shortages in immigrant-dependent industries, and government spending pressures all combine to generate higher wage-driven inflation.

There is also an unexpected element in the monetary policy landscape: looser financial conditions favored by the Fed may persist, combined with higher fiscal deficits (projected to exceed 7% of GDP), all pointing toward an inflation-unfriendly environment in the future.

The Federal Reserve in a Tight Spot

The unexpected inflation pressures place the Federal Reserve in a challenging position. If inflation remains higher than expectations, the central bank will not be able to cut interest rates as aggressively as markets have hoped. The official inflation measure (Consumer Price Index) fell to 2.7% in 2025, the lowest since 2020, but this may only be a temporary respite.

While some investment banks expect the Fed to reduce rates by 50-75 basis points this year, the crypto community is pushing for faster action. The unmaterialized disinflation scenario has shifted the calculus— the real risk now is not over-aggressive cuts, but prolonged caution by the Fed that could delay the recovery of risk assets.

Bitcoin and the Broader Crypto Market at a Crossroads

Market reactions to the unexpected inflation concerns were immediate. Bitcoin dropped approximately 4% last week and is currently around $88,350, following no change in Fed policy. The 10-year US Treasury yield has risen to 4.31%, the highest in five months, making risk-on assets less attractive.

The broader crypto market is testing the waters, with moderate gains in Ethereum, Solana, BNB, and Dogecoin, but overshadowed by weakness in Bitcoin. Bitcoin is actually trading more like a high-beta risk asset rather than a macro hedge—it is in a consolidation phase, roughly 30% below its October peak and struggling to break above key resistance near $89,000.

This unexpected scenario highlights a fundamental challenge for crypto bulls: if inflation remains elevated and the Federal Reserve remains cautious on rate cuts, the narrative of disinflation-driven upside could be compromised. Instead, risk asset allocation will become more dependent on corporate earnings growth and technological innovation drivers rather than macroeconomic monetary easing.

Analysts point out that the real policy risk now is not “cutting too early,” but “staying too restrictive after structural disinflation” driven by AI productivity gains—a scenario that could lead to a sudden adjustment later on. This is why markets are beginning to price in the ‘policy catch-up’ risk, creating volatility across multiple asset classes, including the cryptocurrency space.