The Fed Continues Quantitative Tightening

Benjamin Cowen

Summary of the Video Transcript

Introduction to the FOMC Decision

  • The Federal Reserve decided to keep the Fed funds rate at 4.5%, which was expected.
  • The bigger news is the continuation of reducing holdings of Treasury securities and agency debt, indicating ongoing quantitative tightening (QT).

Impact on Cryptocurrency Markets

  • The speaker notes that markets respond to whether monetary policy is in a quantitative tightening or easing regime.
  • The current cycle feels different from the last one, with a harder time for cryptocurrencies to advance.

Advanced Decline Index (ADI)

  • The ADI is used to measure the health of the cryptocurrency market, calculated as the daily advances minus the daily declines plus the prior index value.
  • A rising ADI indicates more advancing cryptos than declining ones, confirming an upward trend if the total market cap is also trending higher.
  • The opposite is true if the ADI is trending lower while the market cap is higher, indicating a loss of momentum.

Historical Context and Bitcoin Dominance

  • In 2020-2021, Bitcoin dominance decreased as altcoins outperformed Bitcoin.
  • Since 2021, the opposite has been true, with Bitcoin dominance increasing, and the ADI putting in lower highs.
  • The speaker attributes this to the ongoing quantitative tightening.

Comparison with Previous Cycles

  • The speaker draws parallels with the 2019 cycle, where QT ended, and the market responded positively.
  • However, the current cycle is different, with QT continuing, and the market not responding in the same way.

Federal Reserve and Interest Rates

  • The Fed has kept interest rates flat, while the Bank of Canada has lowered interest rates and announced an end to quantitative tightening.
  • The speaker examines the differences in monetary policy between the Fed and the Bank of Canada.

Powell's Statements and Market Expectations

  • Powell indicated that the Fed intends to reduce the size of its balance sheet to a level consistent with implementing monetary policy efficiently.
  • The market expects the Fed to hold rates at 4.5% in March, with a chance of rate cuts later in the year.

Bitcoin Dominance and Ethereum

  • Bitcoin dominance has been moving up, struggling to break above 60%.
  • Ethereum (ETH) price in Bitcoin (ETH/BTC) has been discussed as potentially bottoming out around 0.03, similar to previous cycles.

Conclusion

  • The speaker reiterates that as long as QT continues, Bitcoin is likely to hold up better than altcoins.
  • The market's response to changes in monetary policy will be crucial for the direction of cryptocurrencies.