Polymarket Betters Believe US Fed Will End Quantitative Tightening (QT) Program by May

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

According to betting odds on Polymarket, there’s a 100% probability that the US Federal Reserve will stop its quantitative tightening (QT) program by April 30, 2024.

The wager, titled “Will Fed end QT before May?,” has more than $6.2 million in cumulative trading volume. By March 14, it had attracted 1,638 unique betters.

Polymarket is a crypto-based prediction market that lets users 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.

Polymarket users have assigned a 100% probability that the Fed will end quantitative tightening in the coming months. Source: Polymarket

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”:

“The question isn’t whether the Fed can pivot quickly. The question is what will break first to force the Fed’s hand.”

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.

According to the minutes of the January Federal Open Market Committee meeting, some officials were concerned about balance sheet reductions impacting the government’s debt ceiling debate.

The persistence of inflation above the Fed’s 2% target was also a concern among officials. However, the lack of substantial employment weakness despite the central bank’s seven consecutive rate hikes was viewed positively.

According to the summary of economic projections, officials anticipate the U.S. economy to grow by 0.5% in 2024 and maintain an unemployment rate of 4.6% by the end of the year.

During the last two crypto market cycles, Bitcoin’s peak coincided with the top of the business cycle, as expressed by the manufacturing PMI.

As of March, the U.S. Manufacturing PMI has been in expansion mode for two consecutive months, marking a turning point after more than two years of contraction.

This shift in the PMI trend is usually a lagging indicator, suggesting that the downturn in the business cycle may have already bottomed out.

After a period of turbulence in February, cryptocurrency prices have remained relatively stable in March.

If the manufacturing PMI continues to rise in the coming months, it could potentially coincide with a new bull market high for Bitcoin, which aligns with the historical pattern observed during previous cycles.

If the PMI remains in expansionary territory for two consecutive quarters, it would technically indicate that the U.S. economy has entered a recession. However, if the PMI rebounds quickly from the downturn, it could indicate that the recession was mild and short-lived.

Moreover, if the Fed pivots its monetary policy stance by cutting interest rates later this year, it could further support a recovery in crypto prices.

Overall, the current economic indicators and policy trends suggest that the worst of the macroeconomic downturn may be behind and a recovery is on the horizon.

This analysis suggests that the crypto market could experience a rebound in the second half of 2024, which aligns with the common prediction among crypto analysts.

However, it’s important to note that there are still uncertainties regarding the timing and magnitude of the Fed’s policy pivots, which could influence the market’s recovery trajectory.

According to a recent report by the U.S. Bureau of Labor Statistics, the Consumer Price Index (CPI) rose by