Original author: @MacroFang, PSE Trading Trader
The Federal Reserve left interest rates unchanged for the third time, marking the end of its aggressive rate-hike campaign and forecasting a series of rate cuts starting in 2024. In a unanimous decision, officials agreed to keep the benchmark federal funds rate at 5.25% to 5.5%, the highest level since 2001. For the first time since March 2021, there were no further rate hikes expected.
Rate cuts = stock market surges
Rate cuts are often seen as fuel for the market. In fact, we can look back at the rate cut to 0% during the 2020 pandemic. After the Fed completed a series of rate cuts, it triggered a surge in the S&P index. Lower interest rates make borrowing cheaper, which encourages businesses to invest and consumers to spend.
SPX rallied in Dec 2020, since Fed started cutting rates
Fed's 2024 rate cut plan: 75 basis points next year
The Fed expects to cut interest rates by 75 basis points next year, much faster than it expected in September. The median forecast for the federal funds rate at the end of 2024 is 4.6%, although individual expectations fluctuate widely. Eight officials predict fewer than three rate cuts next year, while five expect more.
Dot plot
Powell: There is a high probability that interest rate hikes will end in 2024
Chairman Jerome Powell made clear that the projections do not constitute a pre-set plan. He has left open the possibility of further rate increases as needed to control a surge in price pressures. However, he did confirm that there was discussion of considering a rate cut at this week's meeting.
In early December, Powell warned the market against expecting a rate cut in the first quarter of next year, saying it was too early to tell whether the policy stance was tight enough and to predict when it might be relaxed. Powell and other policymakers agreed that achieving the 2% inflation target would be difficult. Policymakers have pledged to keep interest rates high enough for long enough to ensure price inflation returns to target, leading market participants to expect a rate cut as early as March.
While inflation is forecast to fall this year and next, the Fed’s preferred price measure, which excludes food and energy, is expected to rise 2.4% in 2024. There were slight downward revisions to economic growth next year, while the unemployment forecast remained unchanged.
Impact on Treasury yields
Treasury yields have fallen sharply in recent weeks, effectively erasing gains from the summer through October. A significant tightening of financial conditions may reduce the need for further increases in interest rates. Falling interest rates are already starting to impact the economy, lowering mortgage rates and triggering a recent increase in demand for refinances and home purchases.
Three major positives: BTC and ETH
The Federal Reserve’s interest rate cut has a significant impact on traditional financial markets as well as the cryptocurrency market, especially Bitcoin and other cryptocurrencies.
We see three major positives for BTC and ETH:
ETF Approval
BTC Halving
Fed cuts rates
Bitcoin ETP inflows have soared in recent month as anticipation of a spot ETF has grown.
In a low-interest rate environment, investors often look for high-yielding assets to achieve their desired returns. This environment could favor Bitcoin, a non-interest-bearing asset that becomes an attractive investment alternative due to its potential for high returns.
Asset managers have been adding to ETH futures as well
Bitcoin has historically performed well in low interest rate conditions due to its decentralized nature and potential for significant price appreciation. When interest rates scissored to 0% in 2020 in response to the COVID-19 pandemic, Bitcoin’s price surged as it was viewed as a hedge against inflation and a store of value in an uncertain economic environment.
Rate cuts = long risk assets
Lower interest rates are also good for other risky assets. Companies can borrow at low rates, allowing them to increase capital investment and growth. This situation can stimulate the stock market and boost the value of risky assets. Conversely, assets that are seen as safer, such as bonds, may see a reduction in demand as their relatively low yields become less attractive.
In summary, while the Fed’s possible interest rate scissors in 2024 will have broad implications for a range of financial markets, it could be particularly beneficial for Bitcoin and other risk assets by creating a favorable investment environment.
