The Fed’s Shift: Unstoppable Momentum for Bitcoin’s Bull Run

On Wednesday, the US Federal Reserve opted to maintain its benchmark interest rate within the 4.25%–4.5% range – prompting an immediate reaction from Bitcoin. The pause, while largely expected, arrived with a slightly altered forecast that involves a delayed timetable for forthcoming rate reductions and a significant alteration in the central bank’s balance sheet tapering speed.

Per the Federal Open Market Committee (FOMC) announcement, the Fed’s “Dot Plot” now reveals just two 25 basis-point rate reductions for the current year—fewer than what numerous market participants had predicted in December. Decision-makers emphasized that even though interest rates remain in restrictive range, the actual timing of reductions relies on the trajectory of economic indicators, especially inflation and employment.

Nevertheless, the latest announcement no longer claims that inflation and employment are “in equilibrium,” reflecting the Committee’s rising apprehension regarding economic unpredictability. However, perhaps the most pivotal shift was the Fed’s declaration that it will decelerate the liquidation of its bond assets, commonly referred to as “quantitative tightening” (QT).

Further Reading

Commencing in April, the monthly runoff for government bonds will decrease from $25 billion to $5 billion—a considerable reduction that numerous analysts view as a precursor to a more accommodative policy if economic or market circumstances decline.

Implications for Bitcoin

Shortly after the Fed’s statement, Bitcoin surged approximately 4–5%, temporarily exceeding the USD 86,000 mark. Nik Bhatia—founder of The Bitcoin Layer and author of Bitcoin Age—utilized his latest video update to analyze the ramifications of the decision. “Bitcoin up 4% on the news that the Fed slows QT and is still devoted to reducing interest rates,” Bhatia remarked at the beginning of his assessment, highlighting that the market had been keenly focused on whether the central bank would adjust its quantitative tightening strategy.

Bhatia elaborated on how the decrease of the monthly runoff ceiling from $25 billion to $5 billion can ease liquidity restrictions in the overall system: “Now the Fed is still contracting its balance sheet, but it will now do so at only five billion a month instead of 25 billion a month, and that is a significant shift,” he elaborated.

Further Reading

“This isn’t a scenario where we’re on the verge of QE simply because we reduced from 25 to five, but the initial step is to halt the balance sheet from decreasing … so that if the Fed needs to pivot, it can swiftly transition from 5 billion in QT a month to some moderate expansion.”

Bhatia pointed out that such an action can enhance market risk appetite: “The market perceives the Fed for what it is: it facilitates credit growth which expands balance sheets globally, and that inflow ultimately impacts asset prices … some of those assets may include stocks, Bitcoin—[and] other financial instruments.”

Other professionals are even more extreme in their evaluations. BitMEX co-founder Arthur Hayes declared via X: “JAYPOW delivered, QT essentially ends on Apr 1. The next factor we need to get genuinely bullish about is either SLR exemption and/or a resumption of QE. Was BTC $77k the bottom? Probably. But equity markets likely have more challenges ahead before fully aligning Jay with team Trump, so remain agile and prepared.”

Jamie Coutts, Chief Crypto Analyst at Realvision, largely concurs: “After last night, QT is effectively over (for a while). Treasury volatility has significantly reduced and is now reflecting the decline in DXY from earlier this month. All of this is exceptionally liquidity-friendly.”

At the time of reporting, Bitcoin was trading at $85,881.

Featured image created with DALL.E, chart sourced from TradingView.com