tl;dr
The Federal Reserve's 25-basis-point rate cut this week was overshadowed by hints that its balance-sheet runoff, a key tool of quantitative tightening (QT), may soon end. Market participants now view the potential cessation of QT as the critical factor influencing Bitcoin's trajectory, as it directl...
**Federal Reserve’s Rate Cut and Balance-Sheet Shift Signal Key Momentum for Bitcoin**
The Federal Reserve’s decision to cut interest rates by 25 basis points this week was accompanied by a more significant development: hints that its balance-sheet runoff—a key tool of quantitative tightening (QT)—may soon conclude. While the rate cut itself was modest, market participants are increasingly viewing the potential end of QT as the more pivotal factor influencing Bitcoin’s trajectory.
### The Liquidity Dilemma: QT’s Waning Impact
The Fed’s balance sheet, now hovering near $6.6 trillion—down from a $9 trillion peak—has been a central driver of market dynamics. However, with the Overnight Reverse Repo (ORR) facility nearly drained to around $14 billion, further QT would directly siphon bank reserves, exacerbating liquidity constraints. This shift has made even minor adjustments to QT disproportionately impactful on liquidity, real yields, and the U.S. dollar—two macroeconomic forces closely tied to Bitcoin’s performance.
### Real Yields and the Dollar: The Bitcoin Dual Dials
Before the meeting, real yields had already softened from summer highs, with the 10-year TIPS yield near 1.7% and five-year forward inflation expectations around 2.2%. The dollar index, trading near 99, had also retreated from early-year peaks. These trends created a liquidity-friendly environment, setting the stage for a positive reaction to the Fed’s dovish shift.
Chair Jerome Powell’s remarks reinforced this narrative, stating that the Fed views policy as “sufficiently restrictive” and is prepared to adjust QT to maintain “ample reserves.” This forward guidance, rather than the rate cut itself, has become the critical lever for risk assets. Research underscores that expectations about the Fed’s balance sheet and monetary policy influence long-term real yields more than the federal funds rate, directly shaping investor sentiment and ETF demand.
### ETF Inflows and the Bitcoin Narrative
The link between Fed policy and Bitcoin is further evidenced by ETF data. U.S. spot Bitcoin funds saw roughly $446 million in net inflows in the week leading up to the decision, reversing earlier declines. Historically, FOMC rate cuts have coincided with stronger ETF inflows in the following 48 hours, as lower real yields and a weaker dollar reduce the opportunity cost of holding Bitcoin.
### The Path Forward: QT’s “Endgame” and Market Implications
The Fed’s balance-sheet runoff is now at the center of the conversation. With reserves at $3 trillion and Powell’s October 14 speech framing QT’s “endgame” as an open debate, the market interprets this as a signal that liquidity tightening is nearing its conclusion. As QT winds down, marginal dollars flow back into banking and market systems, fueling risk-taking and crypto demand.
The key takeaway is that Bitcoin’s short-term direction hinges less on the nominal funds rate and more on whether system reserves are expanding or contracting. With real yields drifting lower and the dollar easing, traders are closely watching whether this pattern persists through the week’s settlement.
### A Constructive Setup—For Now
If Powell maintains a dovish tone and the QT pause narrative gains traction, real yields could decline further, the dollar may weaken, and ETF inflows could accelerate, creating a favorable environment for Bitcoin. However, any pivot toward inflation vigilance could reverse these gains.
In the end, the Fed’s liquidity guidance—not just the 25-basis-point cut—will determine the near-term path for Bitcoin. As the balance-sheet debate concludes, the market’s focus remains on the interplay between monetary policy, dollar dynamics, and the evolving appetite for risk assets.