As bitcoin (BTC) strives to bounce back from a recent slide, market watchers are closely anticipating Wednesday’s Federal Reserve (Fed) rate announcement for potential support. Some analysts suggest that revealing an end to its balance sheet runoff strategy, also referred to as quantitative tightening, could serve as encouraging news for investors.
The Fed is expected to announce its rate decision at 18:00 UTC, with Chairman Jerome Powell scheduled to hold a press conference half an hour later.
No significant adjustments to the current interest rate range of 4.25% to 4.50% are expected; thus, attention will center on the policymakers’ approach to quantitative tightening. This arises amid concerns that continued QT might squeeze liquidity within the financial system as the Treasury navigates the ongoing debt ceiling dilemma. Additionally, the summary of economic projections will be of interest to the markets.
Since June 2022, the Fed has been gradually reducing its balance sheet under the QT program, which had ballooned to an unprecedented $9 trillion after the COVID outbreak, due to mass asset purchases including bonds aimed at stabilizing the markets.
The minutes from the January meeting indicated that Fed officials contemplated either pausing or decelerating the unwinding of the balance sheet expansion that had fueled the crypto surge of 2020-21. Thus, the chance of Powell hinting at a similar strategy today remains a possibility.
“Late last year, Powell indicated that QT might conclude by 2025. If this topic comes up in Wednesday’s statement or press conference (I anticipate someone will pose the question), it could signal the transition to a new monetary policy landscape and imply the Fed is prepared for additional debt purchases if a return to QE becomes essential,” noted an analyst in a recent newsletter.
“While a resurgence of QE isn’t expected immediately, the influx of liquidity from a major buyer (the Fed) coming back into the market could create favorable conditions,” the analyst continued, emphasizing that concluding QT could be a strategic move to alleviate any liquidity issues within the Treasury market, which faces $9 trillion in debt maturing this year.
Economist Lauren Goodwin from New York Life Investments expressed a similar view, suggesting that an earlier conclusion to the balance sheet runoff could provide the dovish signal that the market craves.
Traders on decentralized betting platform Polymarket perceive a complete certainty that the Fed will conclude the QT program before May. The resolution of this betting will be classified as “Yes” if the central bank increases the amount of held securities week by week by the end of April.
Predictions of QT’s Conclusion
Numerous investment firms, including a major one, anticipate that the Fed will terminate QT amid an environment riddled with economic uncertainty largely influenced by trade tariffs from former President Donald Trump.
“Our rates strategists believe the statement will suggest the Fed is pausing QT until the debt ceiling dilemma is addressed, as indicated by the January meeting minutes. They do not foresee a restart post-resolution of the debt ceiling, but such an announcement likely won’t happen until later this year,” noted a recent client communication.
A halt in QT could exert downward pressure on yields of the 10-year U.S. Treasury notes, often referred to as the risk-free rate, thus encouraging investors to seek riskier assets.
Caution Towards Stagflation Indications
The tariffs imposed by Trump have heightened inflation concerns while simultaneously posing threats to economic growth, potentially leading to stagflation. The Fed’s forthcoming summary of economic projections (SEP) may reflect these dynamics. A reference to stagflation could delay future rate cuts, thereby constraining potential gains for bitcoin stemming from a QT halt announcement.
According to analysts, the likelihood of a stagflationary revision in the SEP—characterized by lower GDP forecasts and higher core PCE projections, with an increasing number of policymakers acknowledging inflationary risks—is considerable.
“If we indeed see a stagflationary shift in official forecasts, the market would likely react negatively. Some of these expectations have already been integrated into market pricing; however, confirmation that the Fed is likely to prolong rate cuts could unsettle those banking on liquidity injections,” said the analyst.
Recent data reflecting U.S. retail sales and regional manufacturing indexes indicates signs of economic fragility. Concurrently, forward-looking inflation indicators have been on the rise, likely adjusting in response to Trump’s tariffs.
In summary, the investment firm emphasized that “the combination of signals from the latest data and enacted policies will likely result in the Fed downgrading growth projections while upgrading inflation this year, subtly acknowledging stagflation.”
“The dot plot should still indicate two rate cuts in ’25 and ’26,” the firm added.