On the evening of March 11 (Beijing time), the US Department of Labor released the unadjusted CPI data for February. At first glance, the numbers appeared calm—year-over-year CPI rose 2.4%, perfectly matching both expectations and the previous figure. Yet the market’s reaction was far from tranquil. According to the CME FedWatch Tool, the probability of a 25-basis-point rate cut at the March 18 Fed meeting has plummeted to just 0.7%, while the likelihood of rates remaining unchanged soared to 99.3%. Even more notably, the market now expects the first rate cut to be pushed back from mid-year to September. Why did this "in-line" inflation report fail to boost rate cut expectations? How are geopolitical conflicts reshaping the macro narrative? This article dives deep into the logic behind the data and explores its potential impact on the crypto market.
Event Overview: Data Meets Expectations, Rate Cut Hopes Freeze
On March 11 (Beijing time), the US Bureau of Labor Statistics reported that the unadjusted annual CPI for February was 2.4%, with core CPI holding steady at 2.5%—both figures in line with market expectations and previous readings. Month-over-month, CPI rose 0.3%, slightly above January’s 0.2%. On the surface, inflation continues its slow cooling trend.
However, after the data release, rate futures pricing painted a very different picture. As of March 12, the CME FedWatch Tool showed:
- March meeting: Probability of a 25-basis-point rate cut is just 0.7%; probability of no change is 99.3%.
- April meeting: Cumulative probability of a 25-basis-point cut is 11.9%; probability of no change is 88.1%.
- June meeting: Cumulative probability of a 25-basis-point cut is 33.8%.
This means the market has not only ruled out a March rate cut, but has also sharply cooled bets on cuts in the first half of the year. The next FOMC meeting is scheduled for March 18, with the following one on April 29.
Background & Timeline: From "Data-Driven" to "Conflict-Led"
To understand the current market pricing logic, two key timelines must be considered.
Timeline One: The Lag in Inflation Data
The February CPI data covers the period from early to mid-February. Yet, right after the data collection window closed, the macro environment shifted dramatically. At the end of February, the "US-Israel-Iran conflict" escalated suddenly, sending international oil prices soaring. The average US gasoline price jumped from $2.98 per gallon before the conflict to $3.58. This means February’s CPI did not capture the recent energy price shock.
Timeline Two: Evolution of Rate Cut Expectations
- Late January: The market widely expected a roughly 30%–40% chance of a first rate cut in March.
- Mid-February: Stronger-than-expected jobs and CPI data pushed the March rate cut probability below 10%.
- Early March: Geopolitical conflict erupts, oil prices break above $100 per barrel, and the market begins repricing the number of rate cuts for the year.
- March 11: February CPI is released, in line with expectations but considered "outdated information" by the market, further locking in rate cut expectations for September.
Data Analysis: Calm Inflation, Restless Expectations
Structural Features of February’s CPI
While headline inflation was steady, the internal data showed structural divergence:
- Housing costs eased: As the largest component of CPI, the housing index rose just 0.2% month-over-month, and rent increases hit their lowest level since January 2021. This was a key factor keeping core CPI at 2.5%.
- Continued core goods deflation: Used car and truck prices fell 0.4% month-over-month, and the communications index dropped 0.5%, continuing to exert downward pressure on inflation.
- Energy and food rebound: Energy prices rose 0.6% month-over-month, food prices increased 0.4%, indicating that living costs are still climbing.
Quantitative Logic Behind Repricing Expectations
The reason the market "skipped over" this CPI report is a shift in macro pricing logic—from "base effects" to "supply shocks." According to CICC estimates, every 10% rise in oil prices pushes US CPI up by about 0.2 to 0.3 percentage points. If oil averages $80 per barrel, Q2 CPI could peak at 3.1%–3.2%; if oil breaks $100, year-over-year CPI could hit 3.5%. That level matches the current Fed policy rate, essentially closing the door on rate cuts.
| Scenario | Oil Price Assumption | CPI Impact | Effect on Rate Cut Expectations |
|---|---|---|---|
| Baseline | $80/barrel | +0.2%–0.3% | First rate cut delayed to September |
| Conflict Escalates | $100/barrel | +0.4%–0.6% | Only one rate cut all year, or none |
| Situation Eases | $70/barrel | Limited impact | June rate cut remains possible |
How Institutions View the "Disconnect Between Data and Reality"
Facing the current macro puzzle, mainstream institutions fall into three camps:
Revisionists of the "Temporary Inflation" Thesis
Sal Guatieri, Senior Economist at BMO Capital Markets, said: "At least heading into this latest energy price shock, inflation did appear to be stabilizing." This view recognizes the mild nature of February’s data but stresses it’s "the calm before the storm"—with March gasoline price spikes likely to bring new inflation pressures.
Stagflation Risk Warners
Brad Conger, Chief Investment Officer at Hirtle Callaghan, offered a vivid analogy: Over-interpreting this data is like "debating the dinner menu on the Titanic," since the economy has already hit the "iceberg" of rising energy costs. Brian Jacobsen, Chief Economist at Annex Wealth Management, warned that the Fed is essentially powerless to address supply shocks caused by geopolitics with monetary policy. If it acts aggressively, it risks repeating the European Central Bank’s 2011 mistake—raising rates in panic over commodity prices and worsening recession.
Cautious Middle Ground
Seema Shah of Principal Asset Management noted: "The Fed has historically looked through energy-driven price spikes, but given inflation has been above target for nearly five years, this time may be harder." Morgan Stanley still expects rate cuts in June and September, but acknowledges the risk of delays to September or even December.
Examining the Narrative’s Authenticity
The core of current market trading is no longer "whether inflation is cooling," but "how geopolitical conflict will transmit to core inflation."
Factually: February’s CPI data accurately reflects price levels during the statistical period, and core inflation is indeed at a five-year low.
From a market perspective: The data is seen as "noise," with the market pricing in future supply shocks ahead of time. Is this pricing reasonable? It hinges on two factors: First, whether oil price increases are sustainable (with Iraqi oil ports disrupted and major nations releasing strategic reserves); second, whether energy costs can effectively pass through to core services (transportation and airfare prices are already showing signs of rising).
Speculatively: The market’s implicit assumption is that even if core inflation remains mild, as long as headline inflation rebounds due to energy, the Fed will stay cautious. This logic is rooted in the sensitivity of consumer inflation expectations—food and energy make up only 20% of the CPI basket, but their impact on public inflation perception is huge.
Industry Impact Analysis: Macro Stress Test for Crypto Markets
For the crypto market, shifting macro liquidity expectations are creating dual pressures.
Delayed Rate Cuts, Later Liquidity Turning Point
Crypto assets, as "early-cycle" assets highly sensitive to global dollar liquidity, rely heavily on the Fed’s easing expectations for valuation recovery. When the market pushes the first rate cut from June to September, it delays the real improvement in liquidity. This directly suppresses risk appetite, especially as leveraged funds remain cautious and stablecoin supply shows no significant expansion.
Conflict Between Safe-Haven Mode and Risk Assets
Escalating geopolitical conflict typically strengthens the dollar index (USD appreciation) and triggers capital flows back to US Treasuries and other traditional safe-haven assets. In this environment, crypto assets often behave like "risk assets," closely correlated with tech stocks such as the Nasdaq, and struggle to serve as "digital gold." Data shows that after oil prices surged and rate cut expectations faded, US stock index futures fell and crypto markets came under simultaneous pressure, reflecting the dominance of macro factors in short-term price movements.
Multi-Scenario Evolution Forecast
Given the current mix of macro variables, three possible paths could unfold over the next 3–6 months:
Scenario One: Oil Prices Spike Then Fall, Inflation Expectations Stabilize
Major countries’ strategic reserve releases prove effective, geopolitical conflict does not escalate further, and oil prices retreat below $80/barrel after a brief spike. Q2 CPI rebounds slightly due to base effects but remains manageable. The Fed starts its first rate cut in September, with two cuts in total for the year. The crypto market, after a quarter of choppy consolidation, sees liquidity-driven valuation recovery in Q4.
Scenario Two: Prolonged Conflict, Stagflation Pressures Intensify
Hostilities persist, risk of Iran blocking the Strait of Hormuz rises, and oil averages above $100/barrel. March and April CPI are significantly lifted by energy transmission, and sticky core services inflation emerges. The Fed keeps rates unchanged all year, or even revisits the possibility of hikes. Crypto markets and other macro risk assets come under simultaneous pressure, with heightened risk of capital outflows.
Scenario Three: Unexpected Easing, Rate Cut Window Moves Forward
Diplomatic efforts lead to a ceasefire, oil prices quickly return to pre-conflict levels. Meanwhile, Q2 jobs data weakens, prompting the Fed to focus on growth. The June rate cut option returns, with three cuts possible for the year. The crypto market starts a trend rally ahead of expectations.
Conclusion
February’s "in-line" CPI data failed to comfort the market as it usually does. Under the shadow of geopolitical conflict, this report feels more like an old ticket—unable to board the ship sailing toward monetary easing. As the macro narrative shifts from "peak inflation" to "supply shock," the logic behind market pricing has been fundamentally reconstructed. The zero probability of a March rate cut is only the beginning of this new logic. For crypto market participants, the coming months demand attention not just to the CPI numbers, but also to Middle Eastern conflict, oil price curves, and every mention of "stagflation" by Fed officials. Until the true liquidity turning point arrives, patience and risk management may prove more valuable than simply picking a direction.
