Crypto industry experts warned on Tuesday that higher-than-expected US inflation could lead to a another Federal Reserve interest rate hike, making borrowing more expensive and potentially discouraging investment in cryptocurrencies.

The US Consumer Price Index (CPI) rose 0.4% month over month in October, above economists’ forecast of 0.3%, according to the Bureau of Labor Statistics – a slower increase than September’s 0.6% rise. Core inflation, which excludes food and energy prices, rose 0.3%, above the expected 0.2%.

Currently, the Federal Reserve holds its benchmark interest rate at 3.75% to 4.00%, after raising it by a quarter-point in September and leaving it unchanged in October.

The report came just a few hours after Federal Reserve Governor Christopher Waller said in London that another core inflation reading of 0.3% or higher could prompt the Fed to consider a larger interest rate hike in December.

“In that case, I believe a 50-basis-point hike in the policy rate should be considered at the December meeting,” Waller said. “Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take.”

Markets were already pricing a quarter-point Fed hike in December. Tuesday’s data and Waller’s remarks are now raising the odds that the Fed would tighten monetary policy more aggressively in December, potentially raising borrowing costs and squeezing returns for leveraged crypto investors.

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Crypto experts warn of higher borrowing costs

After the CPI release, traders were pricing in slightly more than a quarter point of Fed tightening for December, according to Jeff Anderson, head of US at crypto trading firm STS Digital.

“Following today’s CPI release, markets are now pricing approximately 27 basis points of tightening into the December rate curve,” Anderson said in comments shared with Cointelegraph. “The prospect of another rate hike is becoming increasingly difficult to ignore.”

CME FedWatch data as of 16:28 UTC on Tuesday showed an 88.3% chance of a quarter-point rate hike in December and an 11.7% chance of a half-point increase. Meanwhile, the broader crypto market was trading lower following the report, with total market capitalization falling 1.6% over the past 24 hours to $2.57 trillion, according to CoinGecko.

Bitcoin (BTC) traded near $73,274, down 2% over the past 24 hours, while Ether (ETH) fell nearly 5% to around $2,028 and Solana (SOL) dropped 5.6% to $82.

Experts said that higher interest rates could also reduce profits from some crypto investments. Adam Haeems, head of asset management at Tesseract Group, told Cointelegraph that investors who borrow money to make other investments could earn less if borrowing becomes more expensive.

“Carry strategies earn the gap between what their assets yield and what they pay to borrow, so they are squeezed when borrowing costs rise relative to that yield,” Haeems said. “Over the past two weeks the rate paid to USDC lenders on Aave’s main market ranged from about 3.2% to 7%, while three-month Treasury yields stayed close to 4.2%.”

The difference, in turn, could influence where investors put their money, especially if traditional investments offer better returns with less risk.

Inflation adds to pressure after US midterms

The inflation report also came a week after the US midterm elections, in which Democrats won control of both the House and Senate.

“There is also likely to be growing political pressure from a blue Congress to bring inflation under control, potentially reinforcing the case for higher rates,” Anderson said.

Still, he added that he remained skeptical about whether further rate hikes would address the underlying causes of inflation.

While Congress does not set interest rates, lawmakers can influence economic policy and crypto regulation. For instance, the CLARITY Act, a bill aimed at creating clearer crypto rules for the US, has been stalled since January amid disagreements between Democrats and Republicans.

The shift in congressional power combined with the possibility of higher borrowing costs could create even more uncertainty for crypto investors, experts said.

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