Good news, guys! The minutes of the January meeting released by the Federal Reserve last night released a heavy signal - Federal Reserve officials talked about slowing down or suspending the balance sheet reduction for the first time! This is definitely great news for the crypto market, which is currently facing an extremely tight liquidity situation!
Why is this a major benefit?
As we all know, the Federal Reserve has stopped cutting interest rates since January this year, and market liquidity has continued to tighten. If it weren't for the Trump administration's continuous release of favorable policies to support the bottom, the price of bitcoin would have already started to fall back. If there is no new liquidity injected into the market in the future, the 219,000 mark will be in jeopardy, let alone a new high.
The impact of the Federal Reserve’s monetary policy on the crypto market:
1. When the Federal Reserve implements an interest rate cut policy, the yields of traditional financial assets will decrease, which will prompt investors to turn their attention to riskier assets with higher returns (such as bitcoin).
At the same time, quantitative easing (QE) injected large amounts of liquidity into the market by purchasing Treasury bonds and mortgage-backed securities, further pushing up the prices of risky assets.
The early days of the epidemic in 2020 was a typical case, when the Federal Reserve’s ultra-low interest rates and large-scale QE directly pushed the price of Bitcoin from US$4,500 in March 2020 to US$68,000 in November 2021, an increase of more than 14 times.
2. When the Federal Reserve starts a rate hike cycle and implements quantitative tightening (QT), the market environment will change fundamentally. The rate hike increases the cost of funds, making investors more inclined to hold low-risk assets (such as the US dollar) rather than high-risk crypto assets.
At the same time, QT means that the Fed stops buying assets and even starts selling the bonds it holds, which will directly plunder market liquidity and deal a heavy blow to risky assets. The experience in 2022 is the best proof, when the price of Bitcoin fell from about $44,000 at the beginning of the year to $16,500 at the end of the year, a drop of more than 60%.
Summarize:
The signal of the Fed's suspension of balance sheet reduction is a relatively positive policy shift expectation. This is of great significance for easing the liquidity pressure in the market and boosting market confidence. However, it should be noted that there are still variables in the implementation of the policy, and we need to continue to pay attention to the Fed's subsequent statements. We must do a good job of risk management and make rational decisions!
