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The U.S. Federal Reserve is in an apparent conundrum, wrestling with two scenarios.

Continue the recent pace of rate hikes: Inflation (while declining) is still too high, the tightness of labor markets is likely to push prices even higher and inflation is acting as a tax that impacts everyone. Nothing has changed.

Reverse course: While inflation is still high, the pace of rate increases has diminished the value of bond portfolios. The consequence of this trend has affected the financial stability of numerous banking institutions; thus the financial stability of all depositors in jeopardy. Everything has changed.

Crypto markets favor the second option. Bitcoin (BTC) and ether (ETH) are up 5% and 4%, following Tuesday’s release of inflation data.

The markets are concerned the U.S. central bank’s ongoing monetary hawkishness is a bigger, more immediate threat to the economy than inflation. The recent banking crisis has supported their contention.

Meanwhile, Tuesday’s Consumer Price Index (CPI) report showed a few items of note. Inflation rose 0.4% in February, a move in the right direction from the 0.5% increase in January.

But core inflation, which excludes volatile food and energy prices, rose to 0.5% from 0.4% in the prior month. On an annualized basis, U.S. consumers are paying more for everything across the board, with the exception of used cars and a mild contraction in gasoline. The narrative of troublesome inflation remains intact.

Tuesday’s price action suggests that inflationary concerns will be secondary to those of economic growth.

Bitcoin increased 4% in the hour of the CPI data release, and breached $26,000, its highest level since June 2022.

Bitcoin trading activity spiked to more that twice its 20-day moving average for the second consecutive day, while also breaching the upper range of its Bollinger Bands.

Bollinger Bands are a widely used technical indicator that plots an asset’s moving average and calculates price points that are two standard deviations above and below the average. A breach of either the upper or lower band is significant as prices are expected to remain within two standard deviations of its average, 98% of the time. This marks the first upper band breach in 57 days.

ETH is on the precipice of doing the same, although a breach of the upper band has not been confirmed. Volume was 25% higher than its 20-day moving average. Other notable names whose volume was two times higher than normal were Polkadot’s DOT, Litecoin’s LTC and Ethereum Classic’s ETC.

The macro narrative has returned to crypto markets, with what appears to be much less certainty now. The probabilities for a milder 25 basis point rate increase have oscillated from 0% to 35% to 16.6%, in just a week.

The volatility displayed in the aforementioned comment on rate probabilities will likely show itself in risk assets and cryptocurrencies especially in upcoming weeks.