Battered BTC Market Looks to Federal Reserve for Support, BofA Predicts End of QT

As Bitcoin (BTC) continues to navigate the turbulent waters of a recent downturn, attention is shifting to the imminent Federal Reserve (Fed) rate decision scheduled for Wednesday. Market participants are keen for indications that the Fed might conclude its balance sheet runoff program, known as quantitative tightening (QT), a move that could provide significant support to the cryptocurrency market.

The anticipated announcement will come at 18:00 UTC, with Fed Chairman Jerome Powell holding a press conference shortly after. While no drastic shifts in the interest rate, currently between 4.25% and 4.50%, are expected, the spotlight will be on the Fed’s strategy regarding QT. Policymakers’ insights on this program are particularly critical amidst ongoing concerns about liquidity, especially as the Treasury confronts a challenging debt ceiling.

Since embarking on the QT initiative in June 2022, the Fed has been systematically shrinking its balance sheet, which ballooned to around $9 trillion when it engaged in robust asset purchasing during the pandemic. Should the Fed signal a shift in its current approach, especially regarding the pace of balance sheet reduction, it may allude to the conditions that previously sparked the crypto rally of 2020-21.

Minutes from the January Fed meeting indicated that there was discussion among policymakers about potentially pausing or slowing the QT, suggesting that Powell may unduly influence market expectations in his forthcoming statements. Noelle Acheson, the editor of the “Crypto Is Macro Now” newsletter, highlighted that hints of the QT’s conclusion in Powell’s remarks could mark the beginning of a new monetary regime, wherein the Fed stands poised to resume asset acquisitions if quantitative easing (QE) becomes necessary again.

She also noted that while the resumption of QE is unlikely in the near term, any move by the Fed to inject liquidity into the market could bolster sentiments, especially given the $9 trillion in Treasury maturities expected this year. Furthermore, New York Life Investments’ economist Lauren Goodwin has echoed this sentiment, suggesting that an early cessation of the QT could send a dovish signal to the markets.

Interestingly, traders on the decentralized betting platform Polymarket believe there is a 100% chance that the Fed will terminate the QT program before May, a prediction that will resolve positively if the central bank modifies its weekly securities holdings upward by the end of April.

Market experts, including analysts at Bank of America, have suggested that an end to QT may manifest amid an uncertain economic landscape exacerbated by various factors, including President Donald Trump’s trade tariffs. The bank’s analysts foresee the Fed pausing QT pending resolution of the debt ceiling, a position that is consistent with earlier meeting notes.

In terms of potential market impacts, a halt in QT might lead to a decrease in yields on 10-year U.S. Treasury notes, traditionally seen as a risk-free asset. This environment could enhance demand for riskier assets, such as cryptocurrencies.

Amidst these discussions, inflation remains a significant concern. With Trump’s tariffs contributing to heightened inflation risks, expectations are that the Fed’s projections may show signs of stagflation—a situation where inflation rises even as economic growth contracts. Any acknowledgment of stagflation in the Fed’s summary of economic projections could delay anticipated rate cuts, thereby curbing Bitcoin’s potential gains from any QT-related announcements.

A combination of the latest economic data and implemented policies is likely to lead the Fed to downgrade growth expectations while raising inflation estimates for the year, reinforcing fears of stagflation. As noted by Acheson, if the Fed indicates that interest rate cuts may be pushed further out, it could unsettle investors who are betting on increased liquidity.

With the latest retail sales data and manufacturing indices suggesting an economic slowdown and inflation metrics trending upward, market participants will be closely monitoring both the Fed’s forthcoming decisions and broader economic indicators in the days and weeks ahead.