Fed's QT End Predicted by May, Boosting Crypto Market

Bettors on Polymarket are now certain that the US Federal Reserve will conclude its quantitative tightening (QT) program by May of this year. This prediction, which has been consistent since March 14, suggests a significant shift in monetary policy that could have far-reaching implications for financial markets, particularly the crypto sector.
The wager on Polymarket, titled “Will Fed end QT before May?,” has garnered substantial attention, reflecting the market's anticipation of a policy change. Polymarket, a crypto-based prediction platform, allows users to bet on real-world events and has gained prominence for its accurate predictions, including the outcome of the 2024 US presidential election.
Quantitative tightening is a monetary tool used by the Fed to reduce the money supply by allowing bonds on its balance sheet to mature without reinvestment. This process is the opposite of quantitative easing, which involves expanding the balance sheet to inject liquidity into the economy. The Fed's current QT regime, which began in June 2022, aims to complement other inflation-reducing policies by raising long-term interest rates and draining excess liquidity from the market.
Despite the initial rally in stocks and crypto prices following the start of QT, recent macroeconomic shocks have created a bottleneck. These shocks, stemming from various factors, have highlighted the potential risks associated with QT. TJ Scavone, senior investment director at Cambridge Associates, had previously warned that the negative side effects of QT would become apparent once "something breaks," referring to the potential for market conditions to worsen due to overtightening.
The growing belief that the Fed is prepared to wind down QT is seen as a bullish catalyst for the crypto market. Increased liquidity resulting from the end of QT could trickle down into risk assets, potentially reversing the crypto market's downtrend. This perspective is supported by crypto analyst Benjamin
, who anticipates a broad market rally following the conclusion of QT.While the Fed has not officially confirmed plans to end QT, the minutes from the January Federal Open Market Committee meeting indicated that some officials were concerned about the impact of balance sheet reductions on the government's debt ceiling debate. This concern suggests that the Fed may consider pausing or slowing down QT until the debt ceiling issue is resolved.
Important policy changes at the Fed are occurring alongside a broader pickup in the business cycle. The US Manufacturing Purchasing Managers Index (PMI) has been in expansion mode for two consecutive months, marking a significant shift after more than two years of contraction. Historically, Bitcoin's peak has coincided with the top of the business cycle, as indicated by the manufacturing PMI, suggesting a potential correlation between economic indicators and crypto market performance.

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