The Federal Open Market Committee (FOMC) — an integral monetary policy-making arm of the federal reserve system — is scheduled to hold a meeting soon.
There are strong indications it would largely impact crypto prices in light of the U.S. Federal Reserve's balance sheet increasing by almost $300 billion recently.
Here are three things you need to know before the FOMC meeting:
The Fed Reserve had to increase the balance sheet to meet the liquidity pressure on banks in the US.
In recent times, small and medium-sized banks in the United States have been experiencing setbacks.
Since the news filtered out, depositors have been transferring their deposits to large banks. While some of these banks are not eligible for liquidity, the eligible ones approached the Federal Reserve.
The federal reserve had to provide three liquidity channels for these banks to meet the pressure of liquidity expenditure.
The Fed's liquidity pressure includes the traditional Discount Window (DW), the BTFP liquidity tool, and the liquidity channel.
In addition to all central bank lending facilities — for new entities of SVB and Signature bank (after being acquired by FDIC).
The sum of $148 billion, $12 billion, and $143 billion was allocated for the three liquidity channels.
Quantitative Easing (QE) is a financial policy where a central bank gets a certain amount of financial assets to improve economic activity, which was first used after the financial crisis between 2007 and 2008.
For many, this increase in the balance sheet signifies the restart of QE. However, there are two points of view to analyze this situation.
The first point of view highlights that QE is a monetary policy tool aimed at the price, and financial stability.
The increase is, therefore, necessary for maintaining financial stability. The second is the mechanism.
It identifies the increase as an initiative of the Feds to help commercial banks that lack liquidity. This initiative is part of Quantitative Easing.
The US has deployed the DW and BTFP liquidity channels to maintain financial and price stability.
So long these tools are yielding results, the central bank and Feds will sustain them. So the implication is that such a liquidity mechanism might continue for a while.
Furthermore, the Feds would likely not use interest rate tools to maintain financial stability— since the liquidity channels are working.
So in the near future, as the Fed is deploying the tools to ease liquidity pressure and lessen the bank's repayment crisis, there would be no need for a hike in interest rates.
Should the Fed hike the interest rate alongside the liquidity tools, the banks would struggle to make repayments.
Experts say the more banks access these liquidity channels, the more the fear of the liquidity drying up grows.
This fear makes investors seek alternatives in crypto assets. So while the fear in the banking sector drops, the confidence in the crypto industry increases.
This poses a great outlook for BTC, as it is currently hedged against bank runs. It remains to be seen what impact this would have on Altcoins, however.
Disclaimer: Voice of Crypto aims to deliver accurate and up-to-date information, but it will not be responsible for any missing facts or inaccurate information. Cryptocurrencies are highly volatile financial assets, so research and make your own financial decisions.