The investors of Polymarket are certain that the Federal Reserve will end Quantitative Tightening (QT) by April 2024. This change could have a significant impact on the entire financial landscape, including cryptocurrencies.
According to a survey on Polymarket, a cryptocurrency-based prediction platform, the odds that the Fed will halt the QT program by April 30 have reached 100%, remaining unchanged up to the current date.
The role of Quantitative Tightening (QT) in the monetary policy of the Fed
Quantitative Tightening is a monetary policy tool used by the Federal Reserve to reduce liquidity in the economic system.
The practice consists of not renewing the maturing bonds in the Fed’s balance sheet, counteracting the expansive effect of Quantitative Easing (QE), used after the financial crisis of 2008.
The current QT regime has been in effect since June 2022 and has been used in addition to the increase in short-term interest rates to contain inflation.
The main objective was to increase long-term interest rates and withdraw liquidity from the markets.
Although the expansion of QT has not prevented the stock markets and cryptocurrencies from growing in the last two years, its continuation represents a macroeconomic challenge that could significantly influence the financial markets.
According to some analysts, the monetary tightening may have reached a critical point, making a revision of the current monetary policy tools necessary.
The impact of QT on the cryptocurrency market
Given the strong correlation between cryptocurrencies and traditional financial markets, the tight liquidity control imposed by QT has contributed to increasing the volatility of cryptocurrencies in the early months of 2024.
In February, the sector experienced a sharp decline, with Bitcoin (BTC) losing 30% compared to the January highs and the S&P 500 in correction territory.
However, the growing belief that the Fed will reduce QT is seen by many investors as a bull factor for cryptocurrencies.
With the easing of restrictions and a possible reduction in interest rates in the second half of 2024, the market could return to a bull trend.
The importance of the Fed’s decisions for the crypto sector is also confirmed by the analyst Benjamin Cowen, according to whom the end of QT could trigger a broad market recovery.
This scenario could repeat itself in a manner similar to previous bull cycles, in which Bitcoin reached its all-time highs during periods of significant economic expansion.
Polymarket: the predictions on the end of the Federal Reserve’s Quantitative Tightening
Polymarket is a cryptocurrency-based betting platform that allows users to wager on real-world events. Its popularity particularly grew during the 2024 US electoral cycle, successfully predicting the rise of Donald Trump‘s candidacy.
The current bet on the end of QT, titled “Will Fed end QT before May?“, has generated a trading volume of 6.2 million dollars. Users of the platform now assign a 100% probability to the possibility that the Fed will halt its monetary tightening policy by May.
Indications from the Federal Reserve and the debate on public debt
Although the Federal Reserve has not yet officially confirmed the intention to stop QT, the minutes from the Federal Open Market Committee in January reveal that some members of the Fed are concerned about the impact of the policy on the debate regarding the U.S. debt ceiling.
Some officials believe that, in anticipation of strong fluctuations in bank reserves in the coming months, it might be necessary to consider a pause or a slowdown in the reduction of the Fed’s balance sheet until the issue is resolved.
This point could be crucial for the upcoming monetary decisions and for the evolution of the market.
Positive signals from the U.S. economy
The trend of the USA economy is showing signs of recovery. According to the most recent data, the Manufacturing Purchasing Managers Index (PMI) has recorded two consecutive months of expansion, after more than two years of contraction.
This recovery is significant for the financial markets, as in previous economic cycles Bitcoin reached its all-time highs during periods of economic expansion, thus reflecting the correlation between the business cycle trend and the cryptocurrency market.
Possible scenarios for the coming months
If the Fed confirms the interruption of QT and proceeds with an interest rate cut in the second half of 2024, there could be a reintroduction of liquidity into the financial markets.
This scenario could have a positive effect on both the stock market and cryptocurrencies, potentially laying the groundwork for a new bull phase.
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However, it remains to be seen whether the Federal Reserve will decide to act in this direction or if it will consider alternatives to maintain control over inflation and financial markets. Observers are waiting for the next official statements to confirm what the Polymarket bettors now consider a certainty.
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