With quantitative tightening now concluded, the Federal Reserve has confirmed it will purchase approximately $40 billion in short-term Treasury bills monthly. Fed officials characterized this action as a "technical" measure intended to ensure the smooth operation of the financial system's plumbing, as stated in a December 10 press release and subsequent press conference. This dual action of ending quantitative tightening and recommencing bond purchases is a scenario not witnessed since 2021, the period preceding a significant cryptocurrency bull market. Historically, periods of increased liquidity provided by central banks have often seen risk assets, including technology stocks and cryptocurrencies, experience upward movement, although Bitcoin (BTC) has yet to break through its current resistance levels.
Fed's $40 Billion Treasury Bill Purchase Signals Return of Liquidity Trade
Effective December 12, the Federal Reserve will commence what are termed "reserve management purchases" of Treasury bills, acquiring around $40 billion each month. This initiative aims to maintain "ample" bank reserves, according to the latest policy announcement. Chair Jerome Powell emphasized that this move is not intended as a new stimulus program, stating that the purchases are "solely for the purpose of maintaining an ample supply of reserves over time, thus supporting effective control of our policy rate."
Regardless of the stated technical intention, the immediate effect is clear:
- •The Federal Reserve's balance sheet, which had been contracting since 2022, is set to expand again.
- •The net supply of Treasury bills available to private investors will decrease.
- •An increased amount of cash will circulate within the financial system, potentially prompting investors to take on more risk.
Michael Burry Warns Fed Intervention Highlights Banking System Fragility
Investor and short-seller Michael Burry, known for predicting the 2008 housing crisis, contends that this development signifies a weakening position for the banking system, rather than a sign of strength. In response to the new program, Burry posted on social media, noting the Fed's acquisition of "$40 billion of bills a month" under the new designation of RMPs, and questioning its implications for the system's stability.
He stated, "if the US banking system can’t function without $3+ trillion in reserves… that is not a sign of strength but a sign of fragility."
Burry pointed out that reserves were approximately $45 billion in 2007, around $2.2 trillion before the banking stress of 2023, and that temporary measures like the Bank Term Funding Program (BTFP) had effectively become "load-bearing" support structures. He warned that following every crisis, the Fed faces the necessity of expanding its balance sheet again "or guarantee a bank funding crisis," suggesting this dynamic contributes to the continued rise in stock prices.
Furthermore, Burry indicated his personal investment strategy aligns with this risk outlook, stating he does not follow recommendations to buy bank stocks and instead maintains substantial cash reserves in Treasury money market funds exceeding the FDIC insured limit. Looking ahead, Burry even speculated about a potential "practical limit" where the Fed might end up holding the entirety of the $40 trillion U.S. bond market, remarking somewhat ironically, "So party on, I guess."
Fed's Liquidity Shift Could Trigger Risk-On Sentiment Unaccounted for in Crypto Markets
While Bitcoin has been trading in a narrow range near $90,000, some market observers believe the broader market environment already reflects a strong risk-on sentiment. CNBC crypto trader Ran Neuner highlighted several indicators in a recent social media post, stating, "The market is now in FULL risk-on mode and most people aren’t seeing it because Bitcoin isn’t moving."
He noted the following signals:
- •Silver reaching all-time highs, which is historically considered a "beta" trade correlated with gold.
- •Ethereum (ETH) versus Bitcoin (BTC) exchange rate breaking above its 50-week moving average, often interpreted as Ethereum leading risk appetite within the cryptocurrency space.
- •The Russell 2000 small-cap stock index showing a breakout, a metric commonly viewed by traders as a classic gauge of risk-on sentiment in equities.
Neuner suggested that with the Federal Reserve having "turned the money printer on" and shifting its policy stance sooner than many anticipated, sellers in the Bitcoin market may eventually diminish, potentially leading to a "catch-up trade" as cryptocurrencies begin to reflect the new liquidity conditions.
Currently, the market reaction appears to be measured. At the time of reporting, the total cryptocurrency market capitalization is approximately $3.16 trillion, representing a roughly 2.4% increase over the preceding 24 hours. Bitcoin (BTC) is trading around $90,060, up approximately 2.1% for the day, while Ethereum (ETH) is trading near $3,200, up about 3.7%.