1. What is the Federal Reserve's balance sheet?
Imagine the Federal Reserve has a large water tank (the balance sheet), filled with the government bonds and mortgage-backed securities it has purchased (assets), as well as the money it has printed (liabilities). When it buys bonds, the water level in the tank rises (expanding the balance sheet = injecting money), and when it sells or lets bonds mature without reinvesting, the water level decreases (contracting the balance sheet = withdrawing money).
2. How does this 'water tank' affect your money?
1. The amount of money directly correlates to how much you have.
When there is monetary easing (QE): The Federal Reserve buys aggressively, banks have more money, (just like you would buy for your wife if you had money) everyone finds it easier to get loans, and interest rates are low. For example, during the pandemic in 2020, the Federal Reserve injected $3 trillion in three months, and the stock market rebounded immediately, with gold and Bitcoin surging.
During money withdrawal (QT): The Federal Reserve stops buying bonds and even sells what it holds, leading to less money in the market and higher borrowing costs. For example, during the Federal Reserve's withdrawal in 2022, the U.S. stock market fell by 20%, and mortgage rates soared from 3% to 7%.
2. The strength of the dollar changes accordingly
More money printing may weaken the dollar: more money printed means the dollar loses value. However, if another country prints even more aggressively (like Europe), the dollar may actually rise.
Aggressive money withdrawal can strengthen the dollar: In 2022, the U.S. withdrew money faster than Europe, causing the dollar index to surge to 114, a 20-year high.
3. The stock market, bond market, and housing market are all affected
Stock market: When money is plentiful during periods of money printing, people dare to take risks, and stock prices rise; during money withdrawal, money is scarce, and stock prices tend to drop.
Bond market: When the Federal Reserve buys government bonds, bond prices rise, and yields (interest) drop; if they stop buying, yields may rise.
Housing market: When the Federal Reserve buys mortgage bonds, mortgage rates are low, making house prices likely to rise; if they stop buying, rates rise, and fewer people buy houses.
Three, what key points should you understand when trading?
1. Keep an eye on the Federal Reserve's "tap switch"
When to print or withdraw money: Watch Federal Reserve meetings (8 times a year), especially the chairman's speeches. For instance, if Powell says "may lower interest rates," it often indicates that money printing is imminent.
The speed of money printing and withdrawal: Currently, the Federal Reserve is withdrawing 95 billion dollars per month (95 billion/month), and if it suddenly drops to 50 billion, it indicates a shift is coming.
2. Look at whether the market has enough money to use
The reserves in banks: The Federal Reserve releases its balance sheet every Thursday, focusing on "the money banks have at the Federal Reserve" (reserve balances). If the balance keeps decreasing, it indicates that money is starting to tighten.
Reverse repos (ON RRP): This is a tool for financial institutions to temporarily deposit money with the Federal Reserve. If the scale of ON RRP plummets (for example, from 2 trillion to 500 billion), it indicates that the market is running out of spare money, so be cautious!
3. Seize the opportunities presented by interest rate changes
Short-term interest rates: When the Federal Reserve prints money, overnight rates (like SOFR) will be suppressed, making it suitable for borrowing money to invest.
Long-term interest rates: When the Federal Reserve buys long-term government bonds, the yield on 10-year government bonds will fall, allowing for profit when buying bonds; if not bought, yields may rise, and bond prices may fall.
4. Bet on the reversal of the dollar and other assets
Dollar vs Gold: Federal Reserve prints money, gold rises; during withdrawal, gold falls (except during geopolitical crises).
Dollar vs U.S. stocks: Stocks rise during money printing, but may fall in the early stages of withdrawal; later, it depends on whether the economy can hold up.
Dollar vs Bitcoin: Bitcoin is often treated as an "anti-inflation asset" during money printing, but may plummet during withdrawal.
I am Lao Wang, a practical researcher who has experienced multiple cycles in the cryptocurrency market. From an early trader to a quantitative tool developer, I now focus on blockchain technology analysis and market behavior research. Here, we will use data models to dissect market volatility patterns and penetrate industry information fog with technical analysis, exploring the value logic of the digital asset field together. If you are interested in the evolution of underlying blockchain technology and optimizing trading strategies, feel free to follow me on my personal homepage, and let’s discuss this new field full of possibilities.
Four, let’s give a practical example
Scenario: The Federal Reserve announces that it will begin to reduce the scale of money withdrawal next month (from 95 billion/month to 50 billion).
Stock market: Expecting more money, it may rise in advance (especially tech stocks).
Bond market: Long-term bond yields may fall (the Federal Reserve sells fewer bonds, prices rebound).
Foreign exchange: The dollar may weaken (money withdrawal slows, the dollar becomes less scarce).
Your operation: Buy U.S. stock index ETFs, short the dollar against the euro, buy 10-year government bonds.
Five, three techniques that ordinary people can use
Watch news broadcast-style indicators：
If the Federal Reserve chairman mentions "inflation cooling" or "economic risks" → money printing may be imminent.
If the U.S. unemployment rate suddenly rises for three consecutive months → the Federal Reserve may stop withdrawing money.
Simple indicator to judge cash shortage：
Google search "SOFR rate", if it exceeds 5% for a week → the market is short on cash, reduce stock holdings.
U.S. reverse repos (ON RRP) drop below 1 trillion dollars → prepare to bottom fish gold.
Foolproof operational strategy：
Money printing cycle: Buy Nasdaq ETF (QQQ), Bitcoin, gold.
Money withdrawal cycle: Buy dollars (UUPETF), short-term government bond ETFs (SHV), hoard cash.
Summarize in one sentence:
When the Federal Reserve prints money, you can take risks (buy risk assets), when the Federal Reserve withdraws money, you should be cautious (focus on capital preservation), and keep an eye on bank money and reverse repos, don’t go against the market!
One tree cannot make a forest, a lone sail cannot sail far! In your circle, if you don’t have a good circle and no first-hand information from the crypto world, then I suggest you follow Lao Wang, who will help you profit easily and welcome you to join!!!
