2 min läsningEconomic cooling and Fed policy shifts
The latest economic data suggests that the U.S. economy is losing some of its earlier momentum, and this could lead to significant policy adjustments by the Federal Reserve. Both the manufacturing and service sectors reported weaker-than-expected ISM headline readings, signalling a slowdown in business activity. Employment trends are also under pressure, with job growth showing signs of contraction. The price components in these reports remain elevated, partly due to tariff effects, but inflationary pressures are unlikely to persist at current levels. Given the softer data, markets are increasingly expecting the Fed to respond with rate cuts in the coming months.
July’s jobs report was particularly concerning, with a modest 73,000 jobs added to payrolls. This figure was further compounded by a downward revision of 250,000 to previous months' employment data, which raises questions about the underlying strength of the labour market. The composition of job growth is also troubling. Over the past 31 months, 89% of new jobs have been concentrated in lower-paying, less-secure sectors such as private education, healthcare services, government, and leisure & hospitality. These sectors are characterized by part-time positions, less job security, and lower compensation, which contrasts sharply with the more typical, stable employment expected from a thriving economy. In fact, many other key sectors have posted net job losses in recent months, signalling a broader economic softening.
A broader push to shift Fed policy
In the face of this data, some Federal Reserve officials are starting to revise their stance. Both Chris Waller and Michelle Bowman expressed concerns that the Fed might be "overly cautious" in its policy approach. They warn that the risk of falling behind the curve is becoming more pronounced. This sentiment appears to be gaining traction, with San Francisco Fed President Mary Daly suggesting that the Fed may need to consider more than the two rate cuts she had initially anticipated for 2025. The overall economic slowdown, marked by a clear loss of momentum, could prompt a shift in the Fed’s approach. The next Federal Open Market Committee (FOMC) meeting in September will be closely watched, with markets expecting the central bank to move its policy stance closer to neutral.
This shift in sentiment has sparked investor interest in various asset classes, especially cryptocurrencies. One of the more noteworthy developments this week was the announcement that cryptocurrencies will be permitted in 401(k) retirement plans. This decision opens up access to Bitcoin and other digital assets for a vast pool of retirement savings, estimated at $8.7 trillion. The market response to this news was swift, with prices reacting positively as investors saw this as a significant step toward greater digital asset adoption by mainstream financial institutions.
Additionally, the SEC's latest guidance on liquid staking has provided further positive momentum for the crypto sector. The regulator clarified that entities involved in liquid staking activities, such as Lido and Marinade Finance, are not required to register under securities laws. This is seen as a win for the crypto community, offering more regulatory clarity and potentially encouraging further growth in decentralized finance.
A buying opportunity in digital assets
Despite the weaker economic data and some initial outflows from cryptocurrencies in response to the jobs report, the market has started to stabilise. After a $2B outflow following the disappointing jobs data, the market has corrected, with over $600M of inflows observed, roughly split equally between Bitcoin and Ethereum. This indicates that investors are beginning to view the current downturn as a buying opportunity, particularly in digital assets.
As we move through the remainder of the summer, all eyes will remain on the Fed’s next steps, as well as the broader macroeconomic landscape, which could continue to shift as the year progresses, with the Jackson Hole Symposium likely to be the next policy event that could have a significant impact on crypto prices.
