(Bloomberg) -- Bitcoin is facing renewed headwinds as the Federal Reserve's proprietary inflation forecast for May 2026 jumped to 3.89 percent, a direct consequence of the ongoing energy crisis sparked by the war in Iran.
"If Trump wants someone easy on inflation, he got the wrong guy in Kevin Warsh," said one economist cited by Daily Chartbook, highlighting the hawkish stance of the expected new Federal Reserve chair. The Cleveland Fed's Inflation Nowcasting tool provides the data for the May projection.
The forecast shows a sharp inflationary acceleration, from 2.4 percent in February to a projected 3.89 percent in May. This is fueled by a historic spike in fuel costs, with AAA data showing diesel prices have risen $1.74 per gallon since the Iran conflict began on February 28, constraining 20 percent of the world's daily oil supply.
The prospect of sustained high inflation all but removes Federal Reserve rate cuts from the 2026 agenda, a narrative that had supported risk assets like Bitcoin. With the central bank now more likely to hold or even hike rates under new, more hawkish leadership, investors are expected to favor the safety of yielding assets over speculative ones.
The path to higher inflation has been rapid. Before the conflict in Iran effectively shut down the Strait of Hormuz, trailing-twelve-month inflation in the U.S. was 2.4 percent in February. It jumped 90 basis points to 3.3 percent in March, and the Cleveland Fed's tool now projects a further rise to 3.89 percent by May. This sustained price pressure is forcing the Federal Reserve's hand.
Jerome Powell's final FOMC meeting on April 29 saw the highest number of dissents in 34 years, with three members opposing the committee's easing bias. This internal division signals a significant shift. Powell's term ends on May 15, and his nominated successor, Kevin Warsh, is known for his staunchly hawkish voting record during his previous tenure on the Board of Governors, where he prioritized fighting inflation even during economic downturns.
This new monetary reality poses a direct threat to the valuation of the broader stock market and, by extension, crypto assets. The S&P 500's Shiller P/E ratio currently stands at a precarious 41.83, within striking distance of the dot-com bubble's peak. Much of this valuation has been built on the expectation of lower rates fueling growth in sectors like artificial intelligence. With Goldman Sachs now delaying its rate cut forecast to late 2026, that pillar of support is gone.
For Bitcoin, this means a stronger U.S. dollar and a higher "risk-free" rate from government bonds, reducing the appeal of non-yielding assets. The market must now re-price for a world where inflation, not growth, is the primary concern for the Federal Reserve.
This article is for informational purposes only and does not constitute investment advice.
