Internal divisions within the Federal Reserve intensify, and inflation remains high—the cryptocurrency market awaits clarity.

The growing divisions within the Federal Reserve are not a secondary issue—the issue itself.

In recent months, a familiar tension has resurfaced within the Federal Reserve: deep and open divisions exist. The most recent meeting saw multiple dissenting votes, a situation not seen since 2019. The market's reaction to the rate cut itself was muted, reacting more to the uncertainty surrounding the decision. When central banks cannot agree on their outlook, markets also cannot agree on their expectations.

This widening divergence explains why major risk assets—equities, cryptocurrencies, commodities, and foreign exchange markets—have lost clear direction. Capital flows with confidence when the policy environment is predictable. But when the world’s most influential central banks send ambiguous signals, capital becomes cautious. Investors are reluctant to chase breakouts, hedge funds avoid increasing net exposure, and retail traders lose confidence. Liquidity thins, volatility decreases, and markets consolidate.

The root cause of this economic paralysis lies in a paradox currently affecting the US economy: the inflation rate has only fallen by half, but the labor market remains weak.

The contradictions behind uncertainty

In short, prices are not falling fast enough, while hiring is slowing faster than expected. This situation is rare and fraught with problems. To understand this more intuitively, imagine running a small business in the United States today.

Your raw material costs have increased, as have your rent, insurance, and logistics costs. Most importantly, labor costs have risen sharply, and unlike goods or freight contracts, wages are extremely difficult to cut. You might be able to reduce some working hours or postpone the onboarding of new employees, but significant pay cuts are virtually impossible and would have serious consequences.

You can raise prices, but not too much, or you'll lose customers. This means you'll have to tighten your hiring plans while incurring higher costs. If this practice is prevalent among millions of companies, the broader economic picture becomes clear.

Why is the employment situation so weak?

When profit margins narrow, businesses slow their expansion. They pause hiring, reduce working hours, or freeze new jobs. While this isn't a collapse caused by a recession, it does reflect a gradual weakening of labor demand. Historically, central banks have typically responded to this by cutting interest rates, as weak employment signals a cooling of economic growth.

Therefore, a weak labor market necessitates lower interest rates, as these reduce borrowing costs, thereby supporting investment and consumption. Under normal circumstances, this would be a clear and straightforward policy path.

Why hasn't inflation decreased?

However, inflation in the services sector, which accounts for two-thirds of the CPI basket, is struggling to improve. While goods prices are slowing and housing costs are gradually declining, service prices remain firm. Because service sector inflation is inherently wage-driven, and wages rarely decline, this category of inflation tends to change slowly.

As long as wage costs remain high, businesses will maintain high prices even with weak demand. This persistent pressure suggests that inflation remains too high to support rapid or large-scale easing policies.

Therefore, inflation suggests that the pace of production cuts should be slowed, or even a more cautious stance should be adopted.

The shadow of stagflation

The coexistence of weak employment and persistent inflation is similar to the early stages of stagflation. This does not mean that the situation in the 1970s will repeat itself, but the underlying drivers are similar: inflation is rooted in structural costs rather than excess demand, while economic growth momentum is waning.

This pattern typically occurs late in the economic cycle, when the economy transitions from overheating to cooling. The US experienced a strong surge in inflation starting in late 2021, peaking at over 9% in mid-2022. In response, the Federal Reserve launched its most aggressive tightening policy in decades, raising interest rates from near zero in early 2022 to over 5% by mid-2023. This tightening policy slowed spending, reduced investment, and ultimately led to a weak labor market.

However, inflation adjusts much slower than employment. Wage structures, housing data, and service prices take longer to reflect weak demand, which is why inflation remains high even with declining hiring.

Why the Federal Reserve is divided—and why it is so important

These conflicting data explain the divisions within the Federal Reserve. Some members worry that inflation remains too high to justify further easing, while others warn that delaying rate cuts could push the economy into recession. When realities pull policy in two diametrically opposed directions, consensus becomes impossible.

This uncertainty has a significant impact on the market. Investors cannot accurately predict interest rate movements, making it difficult to value risky assets. Capital tends to adopt a defensive strategy due to uncertainty about the number and pace of rate cuts. Therefore, despite the Federal Reserve's confirmation of rate cuts, risky assets are struggling to establish a clear trend. The Fed's dovish actions have simultaneously sparked a hawkish debate, leaving the market in a dilemma.

What does this mean for cryptocurrencies?

In the short term, the Federal Reserve's recent decision has provided support for cryptocurrencies. Any interest rate cut improves liquidity conditions, which generally favors risk-taking behavior. This is why digital asset prices rose immediately.

However, medium-term uncertainty will dampen market momentum. Cryptocurrencies rely on clear liquidity cycles, either expanding strongly or contracting sharply. Their biggest weakness is indecisiveness—which currently dominates the macro environment.

However, in the long run, the path remains unchanged. The Federal Reserve has already begun easing monetary policy. The pace may slow, the timing may adjust, but the direction remains the same. The scatter plot also reflects this: the destination hasn't changed, only the pace has.

This presents challenges for investors. How do we time our entry points during a slow easing cycle? How do we distinguish between noise and genuine signals? And how do we maintain our investment conviction in an environment where even the Federal Reserve is shrouded in uncertainty?

Moving to the next stage

In times of market clarity, decisive action yields rewards; in times of market volatility, patience brings rewards. The current market environment clearly falls into the latter category. Rather than chasing every market fluctuation, a wiser approach is to understand market cycles, closely monitor turning points, and gradually build positions, rather than engaging in aggressive trading.

The internal divisions within the Federal Reserve are not temporary; they reflect deep-seated structural contradictions in the US economy. Until these contradictions are resolved—until inflation declines significantly or employment stabilizes—market volatility will remain moderate, liquidity will remain cautious, and risk assets will lack direction.

Economic cycles will eventually change. And when that change comes, those investors who remain disciplined and thoughtful will be the ones who gain the upper hand.

The above content is referenced from @Web3___Ace