Federal Reserve Chairman Jerome Powell said Tuesday that the central bank may soon reach a point where its long-standing program to reduce the size of its balance sheet should end. Yet BTC continues to trade in the red, with derivatives indicating continued bearish sentiment.
“Our long-standing plan is to stop the balance sheet runoff when reserves are slightly above the level we believe is consistent with abundant reserve conditions,” Powell said in remarks prepared for his speech at the National Association for Business Economics conference in Philadelphia.
“We could approach this point in the coming months, and we are closely monitoring a wide range of indicators to inform this decision,” he added.
So-called quantitative tightening (QT) began in 2022 to remove extraordinary liquidity that the Fed added to the financial system via balance sheet expansion during the coronavirus crisis. Since then, the total size of the Fed’s balance sheet has grown from about $9 trillion to $6.6 trillion.
Powell’s comments indicate that the Fed does not want to shrink its balance sheet to the point that bank reserves — funds that banks hold at the Federal Reserve — fall below a level that the Fed considers “sufficient.” Staying above this threshold is crucial to avoid disruptions in short-term funding markets and ensure financial stability.
According to the president, that point could be near as the central bank carefully assesses market conditions, including recent increases in various overnight funding rates.
The comments come as markets anticipate two 25 basis point Fed rate cuts by the end of the year, following a similar size reduction in September, and have sparked bullish sentiment on crypto social media.
BTC is not impressed
BTC, however, is not impressed, nor is the broader crypto market. At the time of writing, the leading cryptocurrency by market value was trading at nearly $112,600, largely flat over 24 hours.
Options listed on Deribit linked to BTC showed one-week puts, providing downside protection, continuing to trade at a premium to calls or bullish bets. Options until March 2026 expiration showed similar bearish pricing.
Perhaps this is the market’s way of reminding crypto bulls that a potential end to quantitative tightening does not necessarily mean a quick start to a new balance sheet expansion program, like the COVID one that greased the crypto bull market.
In addition, the pace of QT slowed noticeably from mid-2024. Since April this year, the central bank has limited monthly Treasury bond purchases to $5 billion, while maintaining the cap on mortgage-backed securities at $35 billion. Thus, the impending end of the QT does not necessarily signal a significant bullish or dovish surprise.
“The main takeaway from Powell’s speech today is that the QT program will likely end soon. In other words, the Fed will likely stop shrinking its balance sheet in the coming months. The execution rate of this balance sheet reduction was already very low, so this is not a huge change,” the pseudonymous Markets and Mayhem observer on X pointed out.
