The US Federal Reserve stands ready to deploy its extensive array of monetary policy instruments to avert a swift decline in financial and economic conditions but will only do so if liquidity starts to dwindle or market behavior becomes tumultuous, according to a senior central banker.
In a recent interview, the President of the Boston Fed, Susan Collins, indicated that the central bank is “absolutely prepared” to support markets if necessary.
Image Credit: Walter Bloomberg
Although it is widely recognized that the Fed is always positioned to react promptly to prevent market upheaval, Collins’ comments follow a series of asset sell-offs in stocks and bonds, sparking worries regarding the stability of the US financial system.
Nonetheless, Collins noted that the Fed is “not witnessing liquidity issues” at the moment. Should that situation change, policymakers are equipped with “tools to tackle concerns surrounding market functioning or liquidity,” she explained.
Collins during a December interview. Source: Bloomberg Television
For investors, Collins’ statements might hold particular significance as she serves as a voting member of this year’s Federal Open Market Committee (FOMC)—the 12-member group responsible for determining interest rates.
While Collins and her colleagues opted to maintain interest rates at their March meeting, a noteworthy point was the Fed’s easing of quantitative tightening by significantly reducing the cap on Treasury redemptions by 80%.
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The Fed’s Influence on Markets
Federal Reserve policies exert a strong influence on global markets by affecting the availability of US dollar liquidity and the ease of using dollars for investments and transactions. This liquidity significantly impacts the prices of digital assets, including Bitcoin (BTC).
This was further supported by a 2024 academic study from professors at Kingston University in London, which found that dollar monetary liquidity “has a substantial impact on Bitcoin price.”
After the COVID-19 pandemic, liquidity conditions were responsible for over 65% of the fluctuations in Bitcoin’s price.
“Post-pandemic, [monetary liquidity] is the single most critical factor in determining Bitcoin price, surpassing even fundamental metrics of the Bitcoin network,” the researchers noted.
Macro analyst Lyn Alden arrived at a similar conclusion, labeling Bitcoin as “a global liquidity barometer” in a September article.
Alden highlighted the correlation between Bitcoin’s price and global M2, a broad gauge of money supply across major economies.
Bitcoin’s price moves in tandem with global liquidity over 83% of the time. Source: Lyn Alden
As previously reported, a rise in global liquidity along with a recovering business cycle has historically proven to be a strong predictor of Bitcoin’s price movements. Current trends in liquidity and the business cycle suggest BTC’s price may be set for a rebound in the upcoming second quarter.
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