Consumer spending increased 3.7% Q1 according to the preferred inflation indicator of the Federal Reserve.
After a major federal economic report showed slower-than-expected growth in the U.S. economy in the first quarter, Bitcoin and Ethereum both took a slight downturn Thursday, falling 1% each.
Economists had predicted 2.2% growth in the nation’s gross domestic product (GDP) for the first quarter of this year, but the BEA reported on Thursday that the actual rate of expansion was 1.6%. After six consecutive quarters of GDP growth of over 2%, the economy began to slow down.
The report states that a rise in consumer spending and a slowdown in exports cancel each other out. After 3.4% annualized growth at the end of last year, Thursday’s GDP reading was soft.
In the meanwhile, data from CoinGecko shows that Ethereum’s price dropped to $3,160 and Bitcoin’s price fell to $64,690, respectively, over the past day. Similarly, as this was being written, the S&P 500 on Wall Street had dropped about 1%.
“The headline [GDP] number sort of gives a false signal,” said Sam Bullard, Senior Economist at Wells Fargo, told Decrypt. “Removing the erratic figures reveals that the core growth of the American economy is still going strong.”
For instance, according to Bullard, final sales to private domestic purchasers increased by 3.1% in the first quarter. He elaborated by saying that the measure more accurately reflects the strength of the economy’s underlying domestic demand when it removes changes to GDP from inventories, net exports, and the government.
Core Personal Consumption Expenditures (PCE), the preferred inflation gauge of the Federal Reserve, grew 3.7% in the first quarter, according to the GDP report. The path forward for rate cuts could be impacted by that, according to Bullard, as it is up from 2% in the fourth quarter of 2023.
The Federal Reserve has kept interest rates at a 23-year high for months in an effort to curb inflation, which has reached levels not seen in decades. In a nutshell, rising interest rates can cool a raging economy by making borrowing money more expensive, but they can also dampen the appeal of risky assets like cryptocurrencies and stocks by making safer alternatives like bonds and cash more appealing.
Risk assets, like Bitcoin, have taken a hit this month due to fluctuating expectations for interest rate cuts and heightened geopolitical tensions in the Middle East. Additionally, the CME Group’s FedWatch Tool showed that the expectation that the Fed will maintain a flat interest rate environment in May increased to 90% on Thursday from 83% the previous day.
According to Bullard, “we’re seeing extended resiliency in the U.S. economy on the demand side,” which is supported by the fact that there has been an uptick in core PCE. “With this, the Fed remains in the background when it comes to the timing of that initial rate cut.”