Powell: Likely at peak of rate hikes
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Powell: Likely at peak of rate hikes
Fed turns dovish: ends rate hikes, shifting to rate cuts in 2024.
Navigating Web3 tides with focused insightsAuthor: @MacroFang, PSE Trading Trader
The Federal Reserve has held rates steady for the third time, marking the end of its aggressive rate-hiking campaign and signaling a series of cuts beginning 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 is no expectation of further rate hikes.
Rate Cuts = Stock Market Rally
Rate cuts are typically seen as fuel for the markets. Recall the pandemic-era rate cuts down to 0% in 2020. After the Fed completed its easing cycle, the S&P 500 surged. Lower interest rates reduce borrowing costs, encouraging both corporate investment and consumer spending.
Fed’s 2024 Rate Cut Plan: 75 Basis Points Next Year
The Fed now expects to lower rates by 75 basis points next year—significantly faster than its September outlook. The median projection for the federal funds rate at the end of 2024 is 4.6%, although individual forecasts vary widely. Eight officials anticipate fewer than three rate cuts next year, while five project more.
Powell: Likely End of Hikes in 2024
Chair Jerome Powell made clear that these projections do not constitute a preset plan. He continues to reserve the option to raise rates further if needed to contain surging price pressures. However, he confirmed that discussions about rate cuts were on the table during this week's meeting.
In early December, Powell cautioned markets against expecting cuts in the first quarter of next year, stating it was too soon to judge whether policy was sufficiently restrictive or to predict when easing might begin. Powell and other policymakers agree that achieving the 2% inflation target will be difficult. Officials are committed to keeping rates high for as long as necessary to ensure inflation returns to target, leading market participants to anticipate cuts as early as March.
While forecasting declining inflation this year and next, the Fed’s preferred price measure (excluding food and energy) is expected to rise 2.4% in 2024. Economic growth forecasts for next year have been slightly revised downward, while unemployment projections remain unchanged.
Impact on Treasury Yields
Treasury yields have dropped sharply in recent weeks, effectively erasing all gains from summer through October. The significant tightening in financial conditions may reduce the need for further rate hikes. Falling rates are already affecting the economy by lowering mortgage rates and triggering a recent surge in refinancing and homebuying demand.
Three Major Tailwinds: BTC and ETH
Federal Reserve rate cuts will have significant implications for both traditional and crypto markets, particularly Bitcoin and other cryptocurrencies.
We see three major tailwinds for BTC and ETH:
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ETF Approval
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BTC Halving
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Fed Rate Cuts
In a low-rate environment, investors often seek higher-yielding assets to achieve desired returns. This setting could benefit Bitcoin—an asset that pays no interest but becomes an attractive alternative investment due to its potential for high returns.
Historically, Bitcoin has performed well under low interest rates due to its decentralized nature and potential for significant price appreciation. When rates were cut to 0% in 2020 in response to the pandemic, Bitcoin’s price soared as it emerged as a hedge against inflation and a store of value amid economic uncertainty.
Rate Cuts = Go Long Risk Assets
Lower rates also benefit other risk assets. Companies can borrow cheaply, increasing capital investment and expansion. This dynamic tends to boost equity markets and elevate the value of risk assets. Conversely, safer assets like bonds may see reduced demand as their relatively low yields become less appealing.
In summary, while the Fed’s potential rate cuts in 2024 will broadly impact financial markets, they may be particularly favorable for Bitcoin and other risk assets by creating a supportive investment environment.
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