Federal Reserve Chairman Jerome Powell said Tuesday that the central bank may soon reach a point where it needs to end its long-running program of reducing the size of its balance sheet. However, BTC continues to trade in the red, with derivatives showing deep bearish sentiment.
“Our long-standing plan has been to prevent balance sheet drains when reserves are slightly above the level that we believe is consistent with adequate reserve conditions,” Powell said in prepared remarks for a conference of the National Association for Business Economics in Philadelphia.
He added: “We are likely to get closer to that point in the coming months and are closely monitoring a wide range of indicators to inform this decision.”
So-called quantitative tightening (QT) began in 2022 to remove the extraordinary liquidity that the Fed added to the financial system through balance sheet expansion during the coronavirus crisis. Since then, the total size of the Fed’s balance sheet has fallen from about $9 trillion to $6.6 trillion.
Powell’s comments indicate that the Fed does not want its balance sheet to shrink so much that bank reserves (money banks hold at the Fed) fall below what the Fed considers “adequate.” Maintaining above this threshold is critical to avoid disruptions in short-term funding markets and ensure financial stability.
The chair said that point could be nearing as the central bank carefully assesses market conditions, including recent increases in various overnight funding rates.
The comments came amid bullish sentiment on crypto social media, with markets expecting two Fed rate cuts by the end of the year, following a similar rate cut in September.
BTC wasn’t impressed
However, BTC is unimpressed, and neither is the broader crypto market. At the time of writing, the major cryptocurrencies are trading at close to $112,600 in market value, remaining almost flat on a 24-hour basis.
Deribit exchange-traded options linked to BTC offered one-week puts, provided downside protection, and continued to trade at a premium over calls and bullish bets. Options expiring in March 2026 showed similarly 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 swift start to a new balance sheet expansion program, like the ones that enriched the crypto bull market during COVID-19.
Additionally, the pace of QT slowed noticeably from mid-2024. Since April, the central bank has capped monthly redemptions of U.S. Treasuries at $5 billion, while keeping the cap on mortgage-backed securities at $35 billion. Therefore, nearing the end of QT does not necessarily indicate a significant bullish or dovish surprise.
“The big takeaway from Chairman Powell’s speech today is that the QT program is likely to end soon, meaning the Fed will likely halt balance sheet reduction in the coming months. This run rate of balance sheet reduction was already very small, so it’s not a huge change,” pseudonymous observer Markets and Mayhem noted in X.
