As of March 22, the Federal Reserve’s balance sheet had increased by almost $94.5 billion, an increase of $297 billion from the last week when the banking crisis began.
Hopes of a new QE drive the price of Bitcoin
Total, US central bank liabilities increased by $393 billion in the past two weeks to $8.734 trillion. This figure is close to the all-time high of $8.95 trillion from a year ago, when the Fed began its quantitative tightening program and reduced its assets by $600 billion.
The Fed released the data on March 23, coinciding with the price of Bitcoin (BTC) rising 5.5% towards $29,000. The increase came amid speculation that the Fed’s balance sheet expansion is the result of quantitative easing (QE).
But the Federal Reserve did not use the new dollar reserves to buy long-term Treasury bonds. Instead, The central bank reduced its US Treasury holdings by $3.5 billion to $7.937 trillion, suggesting that quantitative tightening is still in place to curb inflation.
On the other hand, the Fed’s balance sheet grew as it sent out short-term loans to the ailing banking sector.
In particular, as of March 22, the Fed reduced the use of its “discount window,” which helps commercial banks manage their short-term liquidity needs, by $42 billion. Instead, it allocated the same $42 billion to its new Bank Term Financing Program (BTFP).
The other $60 billion went to the Fed’s swap facility that provides liquidity to offshore banks.
The Fed’s tightening policy and credit facilities for regional and offshore banks risk deplete cash liquidity. This may drive the dollar’s valuation against other major foreign currencies, which, in turn, could drive the price of Bitcoin lower in the short term.
Interestingly, the US dollar index has gained 1.5% since the Fed’s balance sheet update.
Has the banking crisis peaked?
Yet the current credit crunch may not have peaked despite the Fed’s $393 billion in emergency loans to banks, given Janet Yellen’s blurry perspective on depositor insurance.
On March 21, the US Treasury Secretary confirmed protection for uninsured depositors of more than $250,000 “if smaller institutions experience deposit runs” like those witnessed at Silicon Valley Bank and Signature Bank.
But Yellen did a 180-degree turn the next day by testifying before the Senate that she had not considered “general deposit insurance or guarantee.” Bank shares plummeted in response to his statement, causing another U-turn.
Yellen then told the House on March 23 that authorities “would be prepared to take additional action if warranted.”
Janet Yellen is too old, incompetent or a liar.
Choose your poison. https://t.co/Vy8CJZm2x1
— The Wolf Of All Streets (@scottmelker) March 23, 2023
Janet Yellen is either too old, incompetent, or a liar.
Choose your poison.
In any case, the market will have to wait for next week’s balance sheet data to determine whether or not the Fed’s liabilities are declining.
But if these emergency credit lines keep increasing after more banks fail, then QE will be inevitable, similar to what happened after the 2008 global financial crisis.
“The return of (stealth) QE via the BTFP and opening of daily Swap Lines with friendly foreign Central Banks clearly signals that sovereign debt will be monetized and currencies will be further debased. The endgame is now undeniable.” https://t.co/s5enNAJCZi
—Balaji (@balajis) March 24, 2023
“The return of (stealth) QE via the BTFP and the opening of daily swap lines with friendly foreign central banks clearly indicates that sovereign debt will be monetized and currencies further debased. The endgame is now undeniable.”
BTC price technical data points to $40,000
An expanding balance sheet, with or without QE, has proven bullish for Bitcoin in the past. This correlation will continue if the banking crisis deepens, according to Stack Hodler, the author of the cryptocurrency-focused newsletter Stack Macro.
“BTFP, Swap Lines, TPI – it’s all QE,” the analyst noted, adding:
“It all leads to balance sheet expansion and fiat currency dilution despite the fact that many Central Bank fans will tell you otherwise.”
From a technical perspective, the Bitcoin price is well positioned to reach $40,000 in June, or 50% higher than the current price.
As illustrated above, the bullish target originates from the breakout setup of the Bitcoin Inverse Head and Shoulders (IH&S) pattern on the weekly chart.
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