The Federal Reserve's room to cut interest rates has narrowed, with inflation stickiness intertwined with political variables

According to the latest news, Indonesian central bank officials have indicated that the Fed’s room to cut interest rates has diminished. This view reflects the current dilemma faced by the Federal Reserve: inflation data remains resilient, and political uncertainties are increasing. Combining recent internal signals from the Fed and market data, the rate cut cycle may be entering a new phase.

The Triple Dilemma of Diminished Rate Cut Space

Sticky Inflation More Persistent Than Expected

Core inflation data is a key reference for the Fed. The latest core PCE remains at 2.6%, still above the Fed’s 2% target. More notably, there are new upward pressures on food prices. According to recent data, fertilizer PPI increased by approximately 17.2% from July 2024 to November 2025, and retail beef prices rose by 21.6%. These upstream costs will eventually pass through to consumers.

This suggests that inflation may not decline as quickly as the market previously anticipated. Fed official Harker recently stated that she is more concerned about persistent high inflation and prefers to keep rates steady until spring, not supporting recent rate cuts. This reflects an increasing hawkish tone within the Fed.

Market Expectations for Rate Cuts Have Significantly Adjusted

CME “FedWatch” data clearly shows this shift:

This indicates that the market’s expectation for large rate cuts in the near term has largely faded. The probability of holding rates steady in January is as high as 95%, and even by March, the combined chance of a cut exceeding 25 basis points is less than 22%.

Increased Political Uncertainty Adds Policy Variables

The Trump administration exerted significant pressure on the Fed, but recent developments have emerged. White House economic advisor Kevin Hassett publicly stated that Trump is more likely to prefer his continued tenure in the White House, which is interpreted as a move away from actively pursuing the Fed Chair position. Currently, former Fed Governor Kevin Warsh is the leading candidate, with market forecasts indicating about a 60% chance.

Such personnel changes could influence the Fed’s policy direction. Meanwhile, issues like the Fed’s annual loss of $100 billion and lack of accountability have been raised again, adding complexity to policy decisions.

Chain Reactions in the Crypto Market

The adjusted expectations of a shrinking rate cut cycle are already reflected in the crypto markets. On January 19, the crypto market collectively retreated, with Bitcoin briefly falling below $92,000 and Ethereum dropping below $3,200. On-chain data shows approximately $593 million in liquidations over the past 4 hours, with longs accounting for nearly 90%.

Analysts believe this correction is driven by multiple factors: rising hawkish expectations for the Fed, renewed tensions over Greenland and US-EU tariffs, and obstacles faced by crypto-friendly legislation like CLARITY in the Senate. But the deeper logic is a market re-pricing of liquidity conditions. When rate cut expectations shift later, high-beta assets—including cryptocurrencies and small-cap tokens—face greater pressure.

Key Data to Watch Moving Forward

The turning point in the Fed’s rate cut cycle may be forming, but several variables require ongoing observation:

• This week’s macroeconomic data, especially core PCE, PMI initial and revised GDP figures
• Final confirmation of the Fed Chair candidate (expected to be announced this month)
• The impact of geopolitical risks on energy prices and inflation expectations
• The actual effect of the $55.3 billion liquidity injection from January 20 to February 10

Summary

The view that the Fed’s room to cut rates has diminished reflects a reality: the market’s previous optimism about the magnitude and pace of rate cuts was overly enthusiastic. Sticky inflation, political uncertainties, and a hawkish shift in policy stance collectively impose new constraints on the rate cut cycle. For the crypto market, this means shifting from a “liquidity easing” mindset to a “macro data-driven” pricing approach. In the short term, high-level volatility may become the norm rather than the start of a one-sided trend. The key is to closely monitor upcoming macro data and Fed signals, rather than over-interpreting short-term fluctuations.