PSE Trading: Powell said that there is a high probability of ending interest rate hikes in 2024

Original article by @MacroFang, PSE Trading Trader

The Fed has 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 the 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 are no further rate hikes expected.

A rate cut = a sharp rise in the stock market

Interest rate cuts are often seen as fuel for the market. In fact, we can recall the 2020 period when interest rates were cut to 0% during the pandemic. After the Fed completed a series of interest 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 rate cut plan for 2024: 75 basis points next year

The Fed expects to cut interest rates by 75 basis points next year, which is much faster than 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 predicted fewer than three rate cuts next year, while five expected more.

Dot plot

Powell: There is a high probability that interest rate hikes will end in 2024

Chair Jerome Powell made it clear that these projections do not constitute a pre-set plan. He has reserved the possibility of raising interest rates further as needed to control the surge in price pressures. He did, however, confirm that there was talk of considering a rate cut at this week’s meeting.

In early December, Powell warned the market not to expect a rate cut in the first quarter of next year, saying it was too early to judge whether the policy stance was tightened enough, and to predict when policy might be eased. Powell and other policymakers agree that achieving the 2% inflation target will be tough. Policymakers have pledged to keep interest rates high enough for long enough to ensure that price inflation returns to target, leading market participants to expect a rate cut as early as March.

While forecasting a decline in inflation this year and next, the Fed’s preferred price measure (excluding food and energy) is expected to grow by 2.4% in 2024. There is a slight downward revision for next year’s economic growth, while the unemployment forecast remains unchanged.

Impact on Treasury yields

Treasury yields have fallen sharply in recent weeks, effectively erasing growth throughout the summer through October. A significant tightening of financial conditions is likely to reduce the need for further interest rate hikes. The drop in interest rates has already begun to affect the economy, lowering mortgage rates and triggering a recent surge in refinancing and home buying demand.

Three Benefits: BTC and ETH

The Fed’s rate cut has had a significant impact on traditional financial markets, as well as the crypto market, especially BTC and other cryptocurrencies.

We see three main positives for BTC and ETH:

1. ETF Approval
2. BTC halved
3. The Fed cuts interest rates

Bitcoin ETP inflows have soared in recent month as anticipation of a spot ETF has grown.

In a low interest rate environment, investors tend to look for high-yielding assets to achieve the desired returns. This environment can be conducive to BTC, a non-interest asset that becomes an attractive investment alternative due to its potential for high returns.

Asset managers have been adding to ETH futures as well

Historically, BTC have performed well in low interest rate conditions because of its decentralized nature and potential for significant price appreciation. The 2020 interest rate scissors to 0% is a response to the COVID-19 pandemic, with BTC prices soaring as it is seen as a hedge against inflation, storing value in an uncertain economic environment.

Rate cut = long risk asset

Lower interest rates are also good for other risky assets. Companies can borrow at low interest rates, increasing capital investment and growth. This can stimulate the stock market and boost the value of risky assets. Conversely, assets that are seen as safer, such as bonds, may see less demand as their relatively low yields become less attractive.

In summary, although the Fed’s possible interest rate scissors in 2024 will have a broad impact on a range of financial markets, it may be particularly beneficial for BTC and other risky assets because it creates a favorable investment environment.