Crypto Could Rebound as Market Signals Shift Amid Trump Tariff War
Market indicators are suggesting a potential decline in inflation, even as the U.S. ramps up its trade war under President Donald Trump—a shift that could bode well for risk assets like bitcoin (BTC).
During his inaugural address on January 20, President Trump pledged to “tariff and tax foreign countries to enrich our citizens.” Just weeks later, on February 1, he made good on that promise, targeting China, Canada, and Mexico with sweeping tariff measures. Since then, tensions have intensified, with the U.S. and China now imposing retaliatory tariffs exceeding 100% on each other’s goods.
Traditionally, tariffs are seen as inflationary since they raise the cost of imported goods, which can then be passed on to consumers. This concern has been amplified in recent months, with markets fearing a tariff-induced surge in inflation—especially after the Federal Reserve forecasted a stagflation scenario marked by sluggish growth, high inflation, and rising unemployment.
In response, risk sentiment has deteriorated. Bitcoin has plunged nearly 20% since early February, and broader markets have seen synchronized selling across equities, bonds, and the U.S. dollar.
Breakeven Rates Point to Disinflation
Yet despite widespread inflation fears, market-based indicators suggest a different story—one of disinflation. Inflation breakeven rates, which are derived from the yield spread between nominal Treasury bonds and Treasury Inflation-Protected Securities (TIPS), are on the decline.
The five-year breakeven rate peaked above 2.6% in early February but has since fallen to 2.32%, according to the Federal Reserve Bank of St. Louis. The 10-year breakeven has slid from 2.5% to 2.19%. Meanwhile, the Cleveland Fed’s two-year inflation expectation remains steady at 2.6%.
Economists argue that while tariffs raise costs initially, their long-term effect may actually be deflationary. If consumer incomes don’t rise alongside prices, demand can fall, leading to excess inventory and eventual price drops. In that context, inflation pressures may ease rather than intensify.
“Since the days of Smoot-Hawley, tariffs have never been inflationary. Rather, they are deflationary and even stimulative,” said Wall Street veteran Jim Paulsen in a post on X (formerly Twitter). “The disinflation reflected in breakevens could encourage the Fed to pivot toward rate cuts. The cavalry is coming!”
Historical Echoes
The argument isn’t new. In a 2001 paper, economist Ravi Batra noted that tariffs in the U.S. historically did not cause inflation. In fact, he observed that high tariffs were often followed by significant declines in the cost of living. According to Batra, tariff-driven inflation is more common in less developed or non-market economies, not advanced ones like the U.S.
Looking Ahead
All signs point to the recent market turmoil being more about growth fears than actual inflation. If breakevens continue trending lower and economic data supports a disinflationary narrative, the Federal Reserve may soon have cover to adopt a more dovish policy stance.
For bitcoin and other risk assets, that could mark a turning point. As inflation fears fade and interest rate cuts come into play, a broader rebound may be just around the corner.
