Service inflation spiraling out of control shatters the dream of rate cuts: Federal Reserve officials jointly warn, crypto markets face long-term high interest rate pressure

Federal Reserve official Goolsbee stated on Wednesday that inflation in the service sector has yet to be brought under control. Behind this statement is a shift in the collective consensus among Fed officials—from expectations of rate cuts to maintaining high interest rates. Currently, core CPI year-over-year is at 2.6%, and overall CPI reaches 2.7%, both above the Fed’s 2% target. Several officials have publicly indicated that the January meeting may keep rates unchanged, with market expectations for a rate cut earliest in June. This suggests that the long-anticipated liquidity easing in the crypto market may still be a little further away.

Why Is Service Inflation So Difficult to Control?

Service inflation behaves very differently from goods inflation. Goods inflation has significantly retreated after the global supply chain recovery, but service inflation remains high. There are several core reasons:

• Strong wage stickiness: The service industry relies on labor, and wages tend to rise but are slow to fall, creating a inflationary spiral
• Resilient demand: Post-pandemic, demand for services like dining, travel, and healthcare remains robust
• Complex transmission mechanisms: Rising wages increase corporate costs, prompting firms to raise prices to maintain profits, and consumers continue to pay for services
• Difficult to anchor expectations: If consumers expect service prices to keep rising, they will preemptively spend, further pushing prices up

What the Fed faces is precisely this “sticky inflation.” While goods prices can fall quickly, service prices are like an adhesive—once they rise, they are hard to fall back.

The Shift in the Fed’s Attitude: From Expecting Rate Cuts to Holding Steady

This collective stance reflects the Fed’s serious attitude toward inflation. Even in the face of investigations into Chair Powell by the Department of Justice, officials remain firm on policy, emphasizing that “political pressure should not interfere with monetary policy.” This resilience indicates that rate cuts are not due to political pressure but because the conditions simply do not support easing.

Market Expectations Shattered and the Gap with Reality

After three rate cuts in 2025, Wall Street’s expectations for rate cuts in 2026 peaked. Some investment banks even predicted an unexpected 25 basis point cut at the January FOMC meeting. But the Fed’s blunt statements have shattered this illusion.

The current reality is:

• Economic resilience exceeds expectations: U.S. December existing home sales hit the strongest since 2023, retail sales rose 0.6% month-over-month
• Inflation remains high: slowing down but still far from the 2% target
• Labor market remains robust: employment levels are stable, wage pressures persist

These factors combined give the Fed no reason to cut rates. The market’s reaction is straightforward—Nasdaq drops 1%, the largest decline in nearly a month.

Deep Impact on the Crypto Market

The environment of high interest rates exerts multidimensional pressure on the crypto market:

Rising liquidity costs

Delayed rate cuts mean high interest rates will persist longer. For crypto projects and traders needing financing, borrowing costs stay elevated, directly depressing risk asset valuations. The liquidity easing expectations sparked by the 2025 rate cut cycle are now being ruthlessly corrected by reality.

Reduced attractiveness of risk assets

Under high interest rate conditions, traditional fixed-income assets (government bonds, high-yield bonds) become more attractive. In contrast, volatile assets like Bitcoin and Ethereum see their relative yields decline, potentially leading funds to flow from crypto to more stable assets.

Repricing of expectations

Markets previously priced in a “2026 rate cut cycle,” but now need to reprice to “extended high rates until June.” This process of expectation adjustment often accompanies asset price volatility.

Key Points to Watch Moving Forward

• Late January FOMC Meeting: Highly likely to confirm rates will stay unchanged in January
• March FOMC Meeting: Observe whether inflation data shows substantive improvement
• May: Powell’s term ends; new chair appointment may bring policy changes
• June FOMC Meeting: Market widely expects this to be the earliest possible rate cut

Summary

The persistent high level of service sector inflation has become the biggest obstacle to Fed rate cuts. The collective statements from officials like Goolsbee are not creating suspense but clearly expressing: inflation is not under control, so rate cuts will not happen. For the crypto market, this means an extended high-interest-rate environment is a certainty.

But it’s not all bad news. Once inflation truly begins to approach the 2% target, the Fed’s rate cuts could be quite decisive. At that point, the suppressed liquidity demand will be released en masse. The key is to endure this “high-rate waiting period.” For crypto investors, the current strategy should be: accept short-term rate pressures and prepare for a policy shift in the medium term. The window around June could be critical.