Betters on Polymarket believe it’s now a certainty that the US Federal Reserve will wind down its quantitative tightening (QT) program by May of this year, a move many analysts say could trigger the next leg of the crypto bull market.
By March 14, Polymarket’s betting odds that the Fed would end QT by April 30 was 100%, where it remains unchanged at the time of writing.
The wager, titled “Will Fed end QT before May?,” has more than $6.2 million in cumulative trading volume.
Polymarket users have assigned a 100% probability that the Fed will end quantitative tightening in the coming months. Source: Polymarket
Polymarket is a crypto-based prediction market that lets betters wager on real-world events. It rose to prominence during the 2024 US presidential election cycle, where it accurately predicted the ascent of Donald Trump.
Quantitative tightening is a monetary policy tool used by the Fed to draw money out of the economy by letting the bonds on its balance sheet mature. It’s the opposite of quantitative easing or the balance sheet expansion that the central bank embarked on following the 2008 financial crisis.
The Fed’s current QT regime has been ongoing since June 2022 as a complement to other inflation-reducing policies. In addition to raising short-term interest rates, the Fed uses QT to raise long-term rates and drain excess liquidity from the market.
Although the start of QT didn’t prevent stocks and crypto prices from rallying — these markets are coming off back-to-back years of impressive growth — it has become a bottleneck due to the recent macroeconomic shocks stemming from the Trump administration.
This was predicted in 2022 by Cambridge Associates senior investment director TJ Scavone, who said the negative side effects of QT would be felt once “something breaks”:
“With QT just now ramping up, the risk it poses to financial markets appears low. Yet, adding QT to what is an already difficult and volatile market environment may worsen market conditions, increasing the risk that “something breaks” from overtightening.”
Related: Polymarket bets on Fort Knox audit as reserve debate heats up
QT and crypto
Crypto’s strong correlation with traditional markets exposed the asset class to extreme volatility in February. By March, the S&P 500 Index was officially in correction territory — and Bitcoin (BTC) was down roughly 30% from its January peak.
The growing belief that the Fed is ready to wind down QT is seen by many as a bullish catalyst for crypto, as more liquidity will eventually trickle down into risk assets. Combined with rate cuts in the second half of the year, there may be enough policy drivers to reverse the crypto market’s multimonth downtrend.
This general playbook is supported by crypto analyst Benjamin Cowen, who believes the end of QT will be followed by a broad market rally.
Source: Benjamin Cowen
Although the Fed hasn’t confirmed whether it will wind down its QT program, the minutes of the January Federal Open Market Committee meeting revealed that some officials were concerned about balance sheet reductions impacting the government’s debt ceiling debate:
“Regarding the potential for significant swings in reserves over coming months related to debt ceiling dynamics, various participants noted that it may be appropriate to consider pausing or slowing balance sheet runoff until the resolution of this event.”
Important policy changes at the Fed are coinciding with a broad pickup in the business cycle. As Cointelegraph recently reported, the US Manufacturing Purchasing Managers Index (PMI) has been in expansion mode for two consecutive months following more than two years of contraction.
During the last two crypto market cycles, Bitcoin’s peak coincided with the top of the business cycle, as expressed by the manufacturing PMI.
Bitcoin’s price exhibits a strong correlation with the ISM manufacturing PMI. Source: TomasOnMarkets
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