Just now! The war pause button was pressed, but the Federal Reserve's "interest rate cut coffin" is being nailed even tighter. How much longer will $BTC remain in the "high-interest prison cage"?

Market observers say that regardless of whether a ceasefire deal is reached in the Middle East, the outlook for Federal Reserve rate cuts has already dimmed. A seemingly contradictory logic is this: if the risk that the conflict expands and drags the economy into recession is the strongest reason to restore rate cuts, then the end of the war could actually make it harder to ease policy in the short term.

At the same time, a ceasefire also reduces the likelihood that the Fed will be forced to raise rates. This is not a simple positive development, but a complex substitution. The March meeting minutes released on Wednesday show that the conflict has not made the central bank give up on rate cuts—it has only made an already cautious stance more complicated. Before hostilities broke out, the path to rate cuts was already narrowing.

The minutes emphasized that the vast majority of participants believed the process of bringing inflation back down to the 2% target could be slower than expected, and the risk of staying above target is rising. Stability in the labor market eased recession concerns, while the decline in inflation has stalled.

Analysis says that the ceasefire eliminates the worst-case scenario—when a price surge completely disrupts supply chains and destroys demand. But it reduces inflation risk to a much smaller extent than it reduces the risk of an extreme economic recession. Energy and commodity prices that rose during the conflict may not fully unwind, and the market optimism brought by the ceasefire is relaxing financial conditions.

Once the risk of severe demand destruction is ruled out, what remains is a stubborn inflation problem. The “echo effect” from recent energy price gains could persist— even if the conflict ends, the impact may still be present in a mild form. Marc Sumerlin, a partner at an economic consulting firm, said that as the probability of a recession declines, the probability of inflation rises instead, because price pressures remain, but demand destruction is less severe.

The March meeting minutes show that at the time, officials were weighing two risks brought by the war: on one side, sudden deterioration in the job market requiring rate cuts; on the other, inflation staying high for a long time requiring rate hikes. In post-meeting projections, most officials still expected at least one rate cut this year, but that entirely depends on whether inflation falls back again. Two officials have already postponed the rate-cut timing they considered appropriate, citing the lack of improvement in recent inflation.

In its statement, the Fed still hinted that the next step is more likely to be rate cuts rather than rate hikes, but the minutes show that the number of officials who believe this “tilt” could be removed has increased. Adjusting the wording would mean that if inflation remains persistently high, rate hikes could also be an appropriate option.

Federal Reserve Chair Jerome Powell’s remarks in recent days outlined the current dilemma: after the pandemic, the Russia-Ukraine conflict, and last year’s tariff increases, the Fed is facing what would be the nearly fourth supply shock late in the year. There is room for policy to wait and see, but a series of one-off shocks could weaken the public’s confidence that inflation will return to normal. The Fed is highly focused on this risk because inflation expectations could become self-fulfilling.

Even before the ceasefire, current and former officials had already said that a rapid resolution of the conflict does not mean policy will immediately return to normal. Part of the reason is that the world has seen the fragility of key waterways, and this risk premium may be built into energy prices and corporate decisions for years to come. Some geopolitical analysts doubt whether a ceasefire can bring oil prices fully back to pre-war levels.

Last week, Musalem, the president of the St. Louis Fed, said that even if the conflict ends in the next few weeks, he would still watch for the “ripple effects” that could keep pushing up prices after supply chains recover. These echoes are worth watching because it takes time to restore damaged production capacity.

This cautious stance echoes a framework proposed by former Fed Chair Bernanke more than two decades ago: central banks should respond to oil-price shocks based on the level of inflation at the time the shocks occur. If inflation is already relatively low and expectations are stable, policymakers can “ignore” the rise in energy prices; but if inflation is already above target, the risk that supply shocks further disrupt expectations calls for tighter policy. And some officials believe this is precisely the situation currently closest to.

For assets like $BTC and $ETH, this means the duration of a high interest rate environment could be longer than the market expects. The liquidity gate has not opened because geopolitical risks are easing; instead, it may be shut tighter due to stubborn inflation. The traditional “flight-to-safety—easing” narrative chain breaks down here, and the market needs to adapt to a more complex, more durable “high-yield rate cage.”

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