The US Federal Reserve liquidity has plummeted by approximately $80 Billion. The drop was primarily caused by an increase in the usage of Reverse Repo agreements, effectively draining liquidity from the market.
Concurrently, the Treasury General Account (TGA) saw a modest decrease, shedding around $30 billion to stand at $809 billion. Despite this reduction, the TGA’s balance remains high.
Experts anticipated the TGA to continue declining in the coming weeks, which could result in a net increase in Federal liquidity.
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This shift in liquidity dynamics was essential for Bitcoin, as increased liquidity generally boosts investor sentiment leading to heightened activity and possibly higher prices in the cryptocurrency space.
The forthcoming weeks could be critical in determining whether this additional liquidity will translate into renewed vigor within the crypto markets.
Bank Term Funding Program and PBoC Liquidity Injections
As of press time, the Federal Reserve’s Bank Term Funding Program (BTFP) had experienced its most considerable weekly decline since its inception, with a $30 Billion reduction.
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Launched in response to the banking sector distress in March 2023, the program provided bail-out loans to stabilize the financial environment.
To date, banks have repaid over 80% of the initially extended $168 Billion, totaling more than $134 Billion returned to the Federal Reserve.
This massive repayment signified a substantial liquidity drain from the system, potentially influencing short-term financial conditions within the broader economy, including the cryptocurrency sector.
Meanwhile, the People’s Bank of China (PBoC) injected approximately 240 Billion RMB ($33 Billion) into the money markets last week, a cautious approach in their monetary policy amidst global economic fluctuations.
This injection was part of a pattern of short-term liquidity boosts that market analysts anticipate will continue, albeit moderately.
Observers are speculating whether these injections will significantly escalate towards the 10 trillion RMB mark or maintain the usual range of 7 to 9 trillion RMB, suggesting a steady but unaggressive strategy.
Despite numerous headlines suggesting major Chinese economic stimulus, the PBoC’s actions remain tempered, possibly in response to the rising USD value, constraining more aggressive monetary loosening.
Impact of Inflation on Crypto
The Federal Reserve’s approach to inflation has been a roller-coaster ride since 2021, starting with the initial declaration that inflation was “transitory,” to the later acknowledgment that it was not.
Subsequent steps included accepting the need for a recession to combat inflation, hoping for a “soft landing,” and projecting that inflation would settle at 2% by 2025.
Most recently, the Fed has debated whether a 50 basis point rate cut is necessary to stave off a recession, while maintaining that the economy is robust and that there is no rush to reduce rates.
These fluctuating policies indicate a lack of a consistent strategy from the Fed, prompting debates about its reliability.
For the cryptocurrency market, these economic policies and shifts in central bank liquidity could have profound implications.
Cryptocurrencies like BTC and Ethereum often react sharply to such macroeconomics, as they influence investor sentiment and risk appetite.
The current scenario, where the US is tightening liquidity while China injects more, could lead to increased volatility in crypto markets, making them both risky and more rewarding for investors.
As central banks wield their monetary policies, the ripple effects could push the boundaries of how cryptocurrencies are perceived and utilized across the globe.
