Fed Expected to Pause QT Amid Debt Ceiling Concerns, Rate Cuts Delayed

The Federal Reserve is anticipated to maintain the current interest rate range of 4.25% to 4.50% during its meeting. The primary focus of the meeting will be on the future of the Fed’s Quantitative Tightening (QT) program, which has been in effect since June 2022, aiming to reduce the Fed’s balance sheet that expanded during the COVID-19 stimulus measures.

Bank of America and other investment banks predict that the Fed will announce a pause in the QT program during today’s meeting. This pause is expected to continue until the debt ceiling issues are resolved, as suggested in the January meeting minutes. The bank does not expect QT to restart after the debt ceiling issues are addressed.

An end to QT could put downward pressure on Treasury yields, potentially increasing investor appetite for higher-risk assets like cryptocurrencies. However, potential gains for Bitcoin might be limited by inflation concerns and the challenging economic landscape created by recent economic data and President Trump’s trade policies.

Analysts anticipate a “stagflationary shift” with lower GDP and higher inflation projections. Trump’s recently implemented tariffs on Mexico and Canada have raised inflation risks while simultaneously threatening economic growth, presenting a classic stagflationary scenario that could delay future rate cuts.

Seema Shah, Chief Global Strategist at Principal Asset Management, believes the Fed will delay policy easing until late second quarter or even early third quarter. Recent U.S. retail sales data and manufacturing indices have shown signs of economic weakness, while forward-looking inflation metrics have been rising, likely adjusting to Trump’s trade policies.

Investors are particularly interested in the Fed’s “dot plot,” which shows committee members’ expectations for future interest rates. There is debate about whether the committee will maintain its previous outlook for two cuts in 2025, remove one or both projected cuts, or potentially add another cut. Most market observers expect the Fed to maintain a patient approach, emphasizing there is “no need to be in a hurry” as central bankers seek “greater clarity” on the direction of Trump administration policies.

Current market pricing suggests traders don’t expect an initial rate reduction until at least June. They are pricing in one additional quarter-point easing and about a 50-50 chance of a third move by the end of 2025. The cryptocurrency market has seen major volatility in recent weeks, with nearly a trillion dollars wiped from valuations. Today’s Fed announcements could play a key role in determining whether Bitcoin and other digital assets can resume their upward trend.