Bitcoin Recovery Hinges on Fed's QT Decision

Bitcoin (BTC) is currently in a recovery phase following a recent downturn, with market observers closely watching the Federal Reserve's (Fed) upcoming rate decision on Wednesday. The focus is on whether the Fed will announce the end of its balance sheet reduction program, known as quantitative tightening (QT), which could provide a boost to the market.

The Fed's rate review is scheduled for 18:00 UTC, followed by a press conference with Chairman Jerome Powell half an hour later. The interest rate is expected to remain within the current range of 4.25% to 4.50%. The primary attention will be on the Fed's plans for the QT program, given concerns about its impact on liquidity and the ongoing debt ceiling issue. Additionally, the summary of economic projections will be closely monitored by the markets.

Since June 2022, the Fed has been gradually reducing its balance sheet, which had expanded to a record $9 trillion post-COVID due to the purchase of trillions of dollars in assets, including bonds, to support markets. The minutes of the January Fed meeting indicated that policymakers discussed the possibility of pausing or slowing the reversal of the balance sheet expansion, which fueled the crypto bull market of 2020-21. Therefore, there is a possibility that Powell may hint at a similar approach during the upcoming press conference.

Noelle Acheson, author of the Crypto Is Macro Now newsletter, suggested that if Powell mentions the end of QT in his statement or press conference, it would signal a new monetary regime. While renewed quantitative easing (QE) is unlikely in the near future, the additional liquidity from the Fed resuming debt purchases could be beneficial. This move would help avoid liquidity issues in the Treasury market, which faces $9 trillion in debt maturity this year.

Lauren Goodwin, Economist at New York Life Investments, echoed a similar sentiment, stating that an earlier end to the balance sheet runoff could provide the market with a dovish signal it is seeking. Several investment banks, including Bank of America, expect the Fed to end QT in a meeting characterized by an uncertain economic outlook, primarily due to trade tariffs. According to Bank of America's March 14 client note, the Fed is likely to pause QT until the debt ceiling is resolved, as suggested in the January meeting minutes. They do not expect to restart QT after the debt ceiling is addressed, but the announcement won't be made until later this year.

A pause in QT could put downward pressure on the yield on the 10-year U.S. Treasury note, potentially increasing demand for riskier assets. However, President Donald Trump's tariffs have raised inflation risks while posing threats to economic growth, creating a stagflationary situation. The Fed's summary of economic projections (SEP) could reflect this, potentially delaying further rate cuts and limiting bitcoin gains from a QT pause announcement. According to Acheson, there is a high chance of a stagflationary adjustment in the SEP, which could startle those counting on liquidity injections.

The recently released U.S. retail sales and regional manufacturing indices revealed signs of economic weakness, while forward-looking inflation metrics have been rising, likely adjusting to Trump's tariffs. Bank of America noted that the combination of the latest data and policies enacted to date should result in the Fed downgrading growth and upgrading inflation this year, a small nod to stagflation. The dot plot is still expected to show two cuts in '25 and '26.