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.