Battered Bitcoin looks to US Fed for support, Bank of America predicts end of quantitative tightening

As Bitcoin (BTC) looks to recover from its recent downturn, observers are looking to Wednesday's Federal Reserve (Fed) rate decision to offer support, with some saying that an announcement to end the balance sheet runoff program, known as quantitative tightening, could be positive news for the market.

The Fed will announce its rate review at 18:00 UTC, followed by Chairman Jerome Powell's press conference half an hour later.

The bank is unlikely to offer any surprises on the interest rate front, retaining the present range of 4.25% to 4.50%. Therefore, the focus will be on how policymakers plan to proceed with the quantitative tightening program, given the concerns that it could affect liquidity in the system while the Treasury grapples with the ongoing debt ceiling issue. Plus, the summary of economic projections will be watched out by markets.

Since June 2022, the Fed, under the QT program, has been slowly shrinking its balance sheet, which had zoomed to a record of $9 trillion post COVID when the bank bought trillions of dollars worth of assets, including bonds, to support markets.

The minutes of the January Fed meeting showed policymakers discussed pausing or slowing the reversal of the balance sheet expansion that greased the crypto bull market of 2020-21. So, the possibility of Powell hinting the same later today cannot be ruled out.

"Late last year, Fed Chair Powell hinted that the end of QT was coming in 2025. If he mentions it in tomorrow’s [Wednesday's] statement or press conference (I imagine someone will ask him), that would end up signalling that we’re in a new monetary regime, and that the Fed stands ready to resume additional debt purchases should QE become necessary again," Noelle Acheson, author of the Crypto Is Macro Now newsletter said in Tuesday's edition.

"While renewed QE [quantitive easing] unlikely any time soon, the additional liquidity from a large buyer (the Fed) coming back into the market to replace maturing holdings would be good news," Acheson added, noting that the end of QT would be a timely move to avoid liquidity glitches in the Treasury market that faces $9 trillion in debt maturity this year.

New York Life Investments' Economist Lauren Goodwin voiced a similar opinion, saying a slightly earlier end to the balance sheet runoff could provide the market with a dovish signal it is looking for.

Traders over decentralized betting platform Polymarket see a 100% chance that the Fed will end the QT program before May. The betting on the same will resolve in "Yes" if the central bank increases the amount of securities it holds outright week-over-week by the end of April.

Bank of America predicts end of QT

Several investment banks, including Bank of America, expect the Fed to end QT in a meeting characterized by uncertain economic outlook mainly stemming from President Donald Trump's trade tariffs.

"Our rates strategists expect the statement to indicate that the Fed is pausing QT until the debt ceiling is resolved, as suggested in the January meeting minutes. They do not expect to restart after the debt ceiling is addressed, but the announcement won't be made until later this year," Bank of America's March 14 client note said.

A pause in QT could put downward pressure on the yield on the 10-year U.S. Treasury note, the so-called risk-free rate, galvanizing demand for riskier assets.

Watch out for stagflation hints

Trump's tariffs have revved up inflation risks while posing risks to economic growth, a stagflationary situation, and the Fed's summary of economic projections (SEP) could reflect that. A nod to stagflation could mean a delay in further rate cuts, potentially limiting bitcoin gains from a QT pause announcement.

According to Acheson, chances of a stagflationary adjustment in the SEP – lower GDP projections and higher core PCE estimates, with more policymakers citing upside risks to inflation – are high.

"If, indeed, we get that stagflationary shift in official projections, the market is unlikely to be happy. To some extent, these are starting to be priced in – but confirmation that the Fed is likely to push rate cuts even further out could startle those counting on liquidity injections," Acheson said.

The recently released U.S. retail sales and regional manufacturing indices revealed signs of economic weakness, Meanwhile, forward-looking inflation metrics have been rising, likely adjusting to Trump's tariffs.

Bank of America put it best: "The combination of signal from the latest data and policies enacted to date should result in the Fed downgrading growth and upgrading inflation this year, a small nod to stagflation."

"The dot plot should still show two cuts in '25 and '26," the investment bank added.