Goldman Sachs, the second-largest investment bank in the world, has predicted that the United States Federal Reserve could cut interest rates twice in the next two years, starting as early as the third quarter of 2024.
Interest rates have a strong correlation to investors’ risk appetite. Goldman Sachs predicted the first Fed rate cut by December 2024, but this forecast has been brought forward to Q3 of 2024 due to cooling inflation, Reuters reported on Dec. 11.
The lender expects the two Fed cuts to bring interest rates to 4.875% by the end of 2024, rather than its previous forecast of 5.13%.
The change comes as data released on Dec. 8 showed stronger-than-expected U.S. labor market results after the U.S. Labor Department’s monthly jobs report said the unemployment rate fell to 3.7% from 3.9% in October.
A report by Reuters cited traders saying that a more robust labor market performance won’t deter the Fed from cutting interest rates. They expect the first cut to come by Q1 of 2024, two quarters earlier than Goldman Sachs’ forecast.
An excerpt from Goldman Sachs’ note on Fed interest cut rates reads:
“Healthy growth and labor market data suggest that insurance cuts are not imminent… But the better inflation news does suggest that normalization cuts could come a bit earlier.”
The federal funds rate is determined by the Federal Open Market Committee and serves as a guide for lending by U.S. banks. It is configured as a range limited by an upper and lower level. Currently, the federal funds rate ranges from 5.25% to 5.50%.
When Fed interest rates drop, borrowing becomes cheaper, fostering an increased appetite for risk-taking among economic and financial markets traders, including cryptocurrencies. An increase in interest rates is often used to contain inflation and reduce the purchasing power of fiat currencies, deterring capital flow into the crypto market.
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Federal Reserve interest rate hikes directly impact the crypto market because they can influence investor behavior. When the Fed raises interest rates, traditional investment asset classes, such as bonds and other fixed-income assets, become more attractive to investors due to stable returns. In turn, investors move funds away from volatile assets such as crypto, leading to decreased demand and potentially causing price corrections or declines.
The market becomes more risk-tolerant once interest rates are brought down, and money starts flowing again into the equity and crypto markets from the less volatile asset classes.
The Fed began tightening interest rates in March 2022 amid growing inflation, hiking them from as low as 0%–0.25%, with the most recent increase in July. However, with expected rate cuts in 2024 and the Bitcoin halving event set for April, both could be catalysts for a post-halving price rally.
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