Federal Reserve Chair Jerome Powell said Tuesday that the central bank could soon reach a point where its long-term program to reduce the size of the balance sheet would have to end. However, BTC continues to trade in the red and derivatives point to persistent bearish sentiment.
“Our long-stated plan is to stop balance sheet liquidation when reserves are somewhat above the level we consider consistent with ample reserve conditions,” Powell said in remarks prepared for his speech at the National Association of Business Economics conference in Philadelphia.
“We may be getting closer to that 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 eliminate the extraordinary liquidity that the Federal Reserve added to the financial system by expanding balance sheets during the coronavirus crisis. Since then, the total size of the Federal Reserve’s balance sheet has decreased from about $9 trillion to $6.6 trillion.
Powell’s comments indicate that the Fed does not want to reduce its balance sheet so much that bank reserves (the funds banks hold at the Fed) fall below a level the Fed considers “ample.” Staying above this threshold is crucial to avoid disruptions in short-term funding markets and ensure financial stability.
According to the president, that point may be approaching as the central bank carefully evaluates market conditions, including recent increases in several 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 increased bullish sentiment on crypto social media.
BTC 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 near $112,600, largely stable over the 24 hours.
Deribit-listed options linked to BTC showed one-week puts, offering downside protection, and continued to trade at a premium to bullish calls or bets. Options expiring in March 2026 showed a similar bearish price.
Perhaps it is the market’s way of reminding cryptocurrency bulls that a possible end to quantitative tightening does not necessarily mean a quick start to a new balance sheet expansion program, like the one that fueled the cryptocurrency bull market during COVID.
Furthermore, the pace of QT has slowed noticeably since mid-2024. Since April of this year, the central bank has capped monthly Treasury bond repayments at $5 billion, while maintaining the limit for mortgage-backed securities at $35 billion. Therefore, the proximity of the end of QT does not necessarily indicate a significant bullish or moderate surprise.
“The big takeaway from Powell’s talk today was that the QT program is likely to end soon. That is, the Fed is likely to stop reducing its balance sheet in the coming months. The run rate of this balance sheet reduction was already very small, so it’s not a big change,” noted pseudonymous observer Markets and Mayhem on X.
