This article is reprinted with permission from Huali Huawai, and the copyright belongs to the original author.
Every speech by Federal Reserve Chairman Powell seems to sway the market. Yesterday (Eastern Time, October 14), Powell delivered another speech, maintaining his usual cautious tone. Here, we will briefly interpret the key points in a few sentences:
Powell mentioned that "our ample reserves regime has proven highly effective" (indicating that the current Federal Reserve policy tools are still functioning well) and that "the outlook for employment and inflation does not appear to have changed much since our September meeting" (the economic outlook has not changed much since September). This signals a stable policy and controllable risks to the market, suggesting that the Federal Reserve currently has no new tightening tendencies, meaning there is no need for aggressive interest rate hikes or additional measures.
He also emphasized that "Data available prior to the shutdown, however, show that growth in economic activity may be on a somewhat firmer trajectory than expected," indicating that the U.S. economy still has good resilience to cope with a future "soft landing," and there is no need for urgent easing measures. In other words, Powell insists that the U.S. economy is not in recession and will primarily shift towards moderate growth.
Additionally, he mentioned a point we consider quite critical: "stop balance sheet runoff when reserves are somewhat above the level we judge consistent with ample reserve conditions. We may approach that point in coming months" (implying that the balance sheet reduction may end in the coming months. Note that Powell only hinted at this and did not explicitly announce a halt to the balance sheet reduction). Generally speaking, when the Federal Reserve stops quantitative tightening (QT), it means that it will no longer withdraw liquidity from the market (i.e., the Federal Reserve does not want to pull liquidity away), leading to relative stability or even further expansion of liquidity flowing back into the market (including the U.S. stock market, cryptocurrency market, etc.).
In summary, although Powell's speech did not mention that the Federal Reserve would continue to cut interest rates, his latest remarks seem to imply that the tightening cycle is nearing its end, and a new round of liquidity return is approaching.
For the complete text of Powell's speech (text version), interested parties can directly check the Federal Reserve website, as shown in the image below.
With Powell's speech, the probability of betting on a 25 bps rate cut by the Federal Reserve in October on Polymarket has risen to 94%, as shown in the image below. It seems that the market has basically "confirmed" that the Federal Reserve will continue to cut rates this month.
According to CME FedWatch data, the probability of a rate cut in October has also remained high at 95.7%, as shown in the image below.
We mentioned an important concept: QT (Quantitative Tightening).
To avoid some partners misunderstanding that the market will rise as long as the Federal Reserve implements QT, we may need to expand the discussion in conjunction with QE (Quantitative Easing).
It is not difficult to understand that QT and QE are completely opposite policy tools. QT mainly suppresses inflation by reducing liquidity, while QE primarily injects liquidity into the market to stimulate the economy.
In his latest speech, Powell also repeatedly mentioned the issue of slowing job growth, but he indicated that QT might end in the coming months, which seems to mean that the Federal Reserve's current policy direction has shifted from controlling inflation risks to suppressing economic slowdown risks. In other words, the focus of Federal Reserve policy is shifting from "solely anti-inflation" to "balancing prices and maintaining economic growth." Although Powell's speech is more of a hint, it seems to announce that the Federal Reserve's balance sheet reduction cycle is entering its final stage.
However, we believe that this change in QT can only be considered a mild bullish signal for Bitcoin (and the U.S. stock market) rather than a direct strong bullish signal. If we are to identify a more direct bullish signal, further QE or fiscal policy stimulus may be needed. This is because stopping QT usually only means that liquidity will no longer continue to tighten, not that QE will be restarted, and it certainly does not mean that liquidity will immediately expand. Historically, true strong bull markets (major bull runs) often occur during liquidity expansion (QE or fiscal stimulus phases).
Here, we can briefly review history:
Many people should have experienced the last bull market. In 2020, the Federal Reserve implemented a massive QE plan and fiscal stimulus in response to the COVID-19 pandemic, leading to a surge in global liquidity, which directly gave rise to that round of cryptocurrency bull market.
However, with the surge in U.S. inflation data, the Federal Reserve resumed interest rate hikes in 2022 and entered the QT plan, leading to a significant adjustment in the cryptocurrency market (accompanied by various panics and crises, such as leveraged liquidations, the LUNA collapse, the FTX bankruptcy, etc.). It was from that time that we initiated the second round of dollar-cost averaging (as shared in previous articles, starting in May 2022, for a period of 20 months, with monthly purchases of Bitcoin). It wasn't until the second half of 2023, with expectations of ETFs, adjustments in the Federal Reserve's interest rate path, and large-scale institutional adoption, that the market gradually began to recover and started a new bull market cycle.
In fact, since the beginning of this year, expectations for Federal Reserve rate cuts and for the Federal Reserve to slow down or end QT have already existed, and one of the core logical foundations for market speculation is based on these expectations. Therefore, we also need to consider a question: the market's expectations for rate cuts and the end of QT may have already been reflected in recent months' prices (or have been partially digested), so the short-term price reaction to bullish stimuli may be relatively limited.
According to Powell's speech hints, the end of QT in the coming months does not mean the restart of QE. Therefore, the market's direction may have several possibilities:
If the Federal Reserve ends QT + the expectation of rate cuts continues this year, then even if the market has already partially digested this in advance, it will still be beneficial for Bitcoin and other assets in the medium to short term, as long as the U.S. inflation data can relatively meet expectations (i.e., no sudden inflation rebound risk occurs). With the subsequent improvement in macro liquidity, some funds should choose to flow back into the market for speculation, such as into high Beta growth stocks (U.S. stock market) or even higher-risk asset categories (cryptocurrency market).
Additionally, if new black swan events occur, such as regulatory shocks or geopolitical shocks, it may still lead to widespread crashes and leveraged liquidations, as seen a few days ago (October 11).
In other words, while we are always bullish on Bitcoin in the long term, it is very difficult to accurately predict the market trend in the medium to short term. This is because, in addition to considering macro factors (such as QE, QT, geopolitical issues), we also need to pay attention to changes in structural market demand (including institutional holdings changes, ETF fund flows), policy changes (including ETF approvals, U.S. regulations on the cryptocurrency market), and on-chain data changes (including exchange balance changes, short-term speculator cost lines, long-term/short-term holder supply, etc.) that may create short-term uncertainties in market prices.
In short, what the big players say may just be what the market wants to hear. We cannot assume that the market will immediately rise just because Powell said QT is about to end, or even go all-in. When facing any so-called opportunity, we first need to consider what our maximum risk tolerance is.
Remember that the Federal Reserve's policy interest rate (federal funds rate) corresponding to the QE plan that started in 2020 was almost close to 0, while the current Federal Reserve rate is 4.00%, far above the zero interest rate level during the pandemic in 2020. Here, we can make a simple inference: if the Federal Reserve wants to restart QE, it will need to continue lowering the interest rate to as low as possible (historically, the Federal Reserve often implements QE when close to the zero interest rate range). If they really do this, given the current global economic situation, it may require a new economic disaster to achieve this. Moreover, simply estimating the time cycle, if the Federal Reserve wants to lower the rate below 1 under relatively aggressive conditions, it may take at least 8-10 months.
In previous articles, we also mentioned a hypothesis: that the fourth quarter of this year (possibly postponed to the first quarter of next year) may be the last phase opportunity of this bull market. Additionally, we speculate that the market may face a relatively deep adjustment (phase bear market) in the third or fourth quarter of 2026, which is also the tentative start phase of our third round of dollar-cost averaging plan set at the beginning of the year (currently only tentative).
Of course, the above is just one of our hypotheses and should not be taken as any investment advice. In the short term, we will continue to take it step by step. In the long term, we should manage our positions well and maintain patience, as we believe that in the next 3-4 years, we will likely see Bitcoin above $200,000.
Related: CME futures open interest surpasses Binance: Has Wall Street fully taken control of the cryptocurrency market?
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