President Trump's trade policy is creating stagflation risks in the US economy. This threatens both traditional markets and cryptocurrency prices as the Federal Reserve faces difficult policy choices.
The new US tariffs under President Donald Trump seem to be in their final stage. However, signs of stagflation are emerging in the US industry.
Economic Data Warns of Stagflation in the US
The Supply Management Institute reported less-than-promising service data on Tuesday. The US Service PMI for July reached 50.1, lower than the expected 51.5. Although still above 50, meaning the service sector is expanding, it decreased by 0.7 points from June's 50.8.
In summary, the US service economy is still growing, but much slower than expected and very close to contracting.
The employment index dropped to 46.4, decreasing 0.8 points from the previous month. When this index is below 50, it means businesses are cutting jobs, and this is the lowest level since March. Conversely, the price index increased by 2.4 points to 69.9—the highest since October 2022. When this index is above 50, it means prices are rising rapidly.
This combination creates stagflation, where there are fewer jobs while prices simultaneously increase. For ordinary people, job hunting becomes more difficult while everything becomes more expensive. Policy makers face an impossible choice between fighting unemployment and controlling inflation.
For central banks, fighting inflation requires raising interest rates, while stimulating growth requires lowering interest rates. Both issues cannot be resolved simultaneously. During stagflation, central banks may struggle to decisively lower interest rates.
Many Stagflation Signs Will Crush the Crypto Market
This context heavily impacted the US financial market on Tuesday. The Dow Jones index dropped 61.90 points (0.14%) to 44,111.74. S&P 500 decreased 30.75 points (0.49%) to 6,299.19. Nasdaq dropped 137.03 points (0.65%) to close at 20,916.55. Bitcoin also dropped approximately 1%.
After the July employment report, expectations have changed for the Federal Reserve's policy. The market now expects two interest rate cuts this year instead of three. According to the CME Group's FedWatch tool, the market expects 25 basis point cuts in September and October.
The probability gap between maintaining and cutting interest rates in December is only 2%. However, if stagflation signals strengthen, this gap could widen.
This issue could significantly impact cryptocurrency prices. Since Congress passed the GENIUS Act on 07/18, Bitcoin has shown increasing sensitivity to economic data. Most altcoins have followed Bitcoin's corresponding volatility.
