Fading hopes of Fed rate cuts cloud cryptocurrency outlook.

Ritu13

Goldman Sachs has been continuously adjusting its expectations for the Federal Reserve's interest rate trajectory this year. The institution initially predicted three rate cuts by the end of the year, but its latest forecast suggests that the first rate cut will occur in June instead of the previously expected March, aligning more closely with the market consensus.

According to some cryptocurrency analysts, the diminishing expectations for Fed rate cuts may lead investors to temporarily opt for holding traditional assets like high-yield, low-risk government bonds, potentially triggering significant volatility in the cryptocurrency market.

Initially, Goldman economists predicted the Fed's first rate cut would occur in December 2024, with only one cut of 25 basis points expected for the year. However, the institution revised its forecast significantly in mid-December 2023, suggesting that the Fed could cut rates three times, with the first cut potentially in March 2024.

However, as 2024 progressed, Goldman anticipated the first Fed rate cut to begin in May 2024, with a total of four rate cuts expected. But with the significant increase in first-quarter US inflation and generally hawkish positions among Fed officials, Goldman economists revised their Fed rate cut expectations once again in March, now predicting the first rate cut in June and reducing the total number of cuts to three, amounting to a total reduction of 75 basis points.

Additionally, Goldman economists project four rate cuts by the Fed in 2025 and one in 2026. They estimate that the final rate will be maintained between 3.25% and 3.5%, lower than the highest point in 23 years—5.25% to 5.5%.

Since December 2023, global financial markets have largely absorbed the expectation of about three rate cuts in 2024; initially, the early 2024 rate futures market overwhelmingly bet on the first Fed rate cut in March. However, strong economic data on inflation and nonfarm payrolls, along with consistently hawkish signals from Fed officials, significantly lowered expectations. While it is a consensus among most rate futures traders to bet on a June rate cut, some traders now further delay the timing of the rate cut to September or later.

Following the release of core PCE data meeting market expectations, the CME's "Fed Watch Tool" shows a 66% probability of a Fed rate cut in June, indicating that most rate futures traders are betting on a June rate cut rather than the previously anticipated March cut in 2024. However, about 40% of traders still believe that the latter half of the year is more likely for the first Fed rate cut. Traders also bet on three rate cuts by the Fed this year, totaling 75 basis points—a consensus consistent with expectations implied by the December and March FOMC dot plots.

After the release of the core PCE data, Fed Chairman Jerome Powell stated that the Fed has always believed that the US economy will not enter a recession. He pointed out that due to the uncertainty of underlying inflation trends, it is difficult to predict when the Fed will lower rates and encouraged the current trend of economic growth. Although the path of inflation decline may be bumpy, it is generally downward, and the Fed expects to begin rate cuts or suitable measures at some point this year.

The cryptocurrency market may be negatively affected by the diminishing expectations for Fed rate cuts. Undoubtedly, maintaining high interest rates for the long term means that the market's risk-free return rate in the denominator of the DCF model will remain high. This potential trend is closely related to the strong bearish sentiment toward cryptocurrencies such as Bitcoin, as well as investors' overall preference for lower-risk assets.

When evaluating assets, investors traditionally place great emphasis on the Fed's interest rate decisions and the management of Fed monetary policy expectations. When market expectations for rate cuts rise across the board, funds are expected to pour into high-risk, high-yield assets, while the holding value of traditional low-risk assets such as government securities typically declines significantly, making assets like Bitcoin and other cryptocurrencies more attractive.

However, the Fed's repeated decisions to delay rate cuts and its bias towards hawkish expectations management may lead investors to temporarily choose to hold very low-risk and relatively optimistic-yielding traditional assets, potentially triggering significant volatility in the cryptocurrency market, especially with Bitcoin hovering around $70,000, which may enter a correction trend. Nevertheless, if the US economy continues to maintain a very strong pace of growth, the high demand for high-risk, high-yield assets like cryptocurrencies may remain long-term.

Iravan774

This outlook doesn't seem optimistic either, does it?

Jatin255

June is highly likely to see a rate cut.