2024.04.01 03:18
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The Fed's rate cut expectations continue to cool, casting a shadow over the prospects of cryptocurrencies

The Fed's rate cut expectations continue to cool, which may have an impact on the cryptocurrency market. Goldman Sachs expects the Fed to cut rates for the first time in June, revising the number of rate cuts to 3 times, totaling 75 basis points. In addition, Goldman Sachs expects the Fed to cut rates four times in 2025 and once in 2026. For investors, the expected rate cuts may temporarily lead to choosing to hold traditional assets such as low-risk government bonds, and the cryptocurrency market may experience significant volatility

According to the financial news app Zhitong Finance, Goldman Sachs, the Wall Street giant, has continuously adjusted its expectations for the Fed's interest rate cut trajectory this year. The institution predicts that the Fed will cut interest rates three times by the end of this year. However, the latest change in Goldman Sachs' expectations indicates that the first rate cut of the year will occur in June instead of the previously expected March, which is in line with the market consensus. Some cryptocurrency analysts believe that the cooling expectations of a Fed rate cut may lead investors to temporarily choose to hold more traditional assets such as high-yield low-risk government bonds, which could trigger significant volatility in the cryptocurrency market.

Initially, Goldman Sachs economists predicted that the Fed's first rate cut would occur in December 2024, with only one cut of 25 basis points expected in 2024. However, the institution made a significant revision to its forecast report in mid-December 2023, announcing that the Fed may cut rates three times, with the first cut possibly in March 2024.

As we entered 2024, Goldman Sachs now expects the Fed's first rate cut to begin in May 2024. However, the institution now expects the Fed to take four rate cuts, but with the first quarter seeing a significant rise in US inflation and Fed officials generally holding hawkish views, Goldman Sachs economists once again revised their Fed rate cut expectations in March. The latest forecast from the institution shows that the Fed's first rate cut will be in June, with the number of cuts revised to three, totaling 75 basis points.

In addition, Goldman Sachs economists also predict that the Fed will cut rates four times in 2025 and once in 2026. They estimate that the final rate will be maintained between 3.25% and 3.5% in the long term, lower than the highest point in the past 23 years - 5.25%-5.5%.

Since December 2023, global financial markets have largely digested the expectation of about three rate cuts in 2024; the early 2024 interest rate futures market once widely bet that the Fed's first rate cut would be at the March meeting. However, strong economic data from inflation and non-farm payrolls, along with consistent hawkish signals from Fed officials, have significantly lowered expectations. While most rate futures traders now expect a rate cut in June, some traders are pushing the timing further to September or later.

Following the release of the core PCE data in line with market expectations, the CME "FedWatch Tool" shows a 66% probability of a Fed rate cut in June, implying that most rate futures traders are betting on a June rate cut rather than the previously expected March cut in early 2024. However, about 40% of traders still believe that the second half of the year is more likely for the Fed's first rate cut. Traders are also betting on three rate cuts by the Fed this year, totaling 75 basis points - consistent with the rate cut expectations implied by the December and March FOMC dot plots Federal Reserve Chairman Jerome Powell stated after the release of the PCE data that the Fed has always believed that the U.S. economy will not head into a recession. He pointed out that due to the uncertainty of potential inflation trends, it is difficult to predict when the Fed will lower interest rates and encourage the current economic growth trend. Powell mentioned that although the path of inflation decline is rocky, it is overall on a downward trend, and it is expected that the Fed will start cutting rates at some point this year.

The cryptocurrency market may be negatively impacted by the diminishing expectations of a Fed rate cut. Undoubtedly, the Fed's long-term maintenance of high interest rates means that the risk-free rate of return in the denominator of the DCF model remains high. This potential trend has a very close relationship with the bearish sentiment towards cryptocurrencies like Bitcoin, as well as the overall decline in investor risk appetite for cryptocurrencies.

When evaluating assets, investors traditionally place great importance on the Fed's interest rate decisions and the Fed's management of monetary policy expectations. As market expectations for rate cuts intensify, funds are expected to flow into high-risk, high-return assets, while the holding value of traditional low-risk assets such as government securities is likely to decline significantly. This makes Bitcoin and other cryptocurrency assets more attractive.

However, the Fed's continuous delay in rate cuts and the Fed's hawkish expectations management may lead investors to temporarily choose to hold traditional assets with very low risk and relatively optimistic returns. This could trigger significant volatility in the cryptocurrency market, especially Bitcoin, which is currently hovering around $70,000, may enter a correction trend. Nevertheless, if the U.S. economy continues to maintain a very strong pace of growth beyond expectations, the high demand for high-risk, high-return assets like cryptocurrencies is expected to persist in the long term