Bitcoin’s Recovery and the Fed’s Rate Decision

As bitcoin (BTC) looks to recover from its recent downturn, observers are looking to Wednesday’s Federal Reserve (Fed) rate decision to offer support. Some analysts believe that an announcement to end the balance sheet runoff program—known as quantitative tightening (QT)—could provide positive news for the market.

The Fed will announce its rate review at 18:00 UTC, followed by Chairman Jerome Powell’s press conference half an hour later.

The bank is unlikely to introduce surprises regarding interest rates, maintaining the present range of 4.25% to 4.50%. Therefore, the focus will shift to policymakers’ plans regarding the QT program amid concerns it could impact liquidity as the Treasury deals with the ongoing debt ceiling issue. Additionally, the markets will be attentive to the summary of economic projections.

Since June 2022, the Fed has been gradually shrinking its balance sheet, which peaked at a record $9 trillion post-COVID when the bank purchased trillions of dollars in assets, including bonds, to support markets.

The minutes from the January Fed meeting revealed discussions about pausing or slowing the balance sheet’s reversal, which fueled the crypto bull market of 2020-21. Therefore, there’s a possibility Powell may hint at a similar approach today.

Late last year, Fed Chair Powell suggested that the end of QT could occur in 2025. If mentioned in Wednesday’s statement or conference, it would signal a new monetary regime, with the Fed prepared to resume additional debt purchases if necessary, as noted by Noelle Acheson, author of the Crypto Is Macro Now newsletter.

While renewed QE (quantitative easing) isn’t expected soon, the return of a significant buyer (the Fed) to the market could positively affect liquidity. Acheson noted that ending QT would be timely to prevent liquidity glitches in the Treasury market approaching $9 trillion in debt maturity this year.

New York Life Investments’ Economist, Lauren Goodwin, echoed this sentiment, stating that an early end to the balance sheet runoff could provide the dovish signal the market craves.

Polymarket Insights

Traders on the decentralized betting platform Polymarket see a 100% chance of the Fed ending the QT program before May. This prediction hinges on the central bank increasing the amount of securities it holds weekly by the end of April.

Bank of America’s Forecast

Investment banks, including Bank of America, predict the Fed will pause QT amidst an uncertain economic outlook, particularly due to President Donald Trump’s trade tariffs. They expect the Fed to indicate a pause in QT until the debt ceiling is resolved, with no plans to restart QT thereafter until later this year.

A QT pause could apply downward pressure on the 10-year U.S. Treasury note, stimulating demand for riskier assets.

Stagflation Concerns

Trump’s tariffs have heightened inflation risks while threatening economic growth, creating a potential stagflation situation. The Fed’s summary of economic projections (SEP) may reflect this. A hint of stagflation could delay further rate cuts, limiting potential gains for bitcoin following a QT pause announcement.

Acheson indicated a high likelihood of stagflation adjustments in the SEP, including lower GDP projections and higher core PCE estimates, with more policymakers warning about inflation risks.

He stated, “If we see this stagflationary shift in projections, the market is unlikely to be pleased. Some of these factors are already being priced in; however, confirming a delay in rate cuts may unsettle those anticipating liquidity injections.”

Recent U.S. retail sales data and regional manufacturing indices have indicated economic weakness. Meanwhile, forward-looking inflation metrics continue to rise, likely influenced by Trump’s tariffs.

As Bank of America summarized: “The combination of recent data signals and existing policies should lead the Fed to downgrade growth and upgrade inflation this year, hinting at stagflation.”

They also mentioned, “The dot plot should still indicate two cuts in 2025 and 2026.”