Polymarket Predicts 100% Chance of Fed Ending QT 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, a move many analysts say could trigger the next leg of the crypto bull market. Polymarket is a crypto-based prediction market that lets betters wager on real-world events. It rose to prominence during the 2024 US presidential election cycle, where it gained significant attention for its accuracy in forecasting outcomes.

Understanding Quantitative Tightening (QT)

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.

The Role of QT in Economic Policy

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 stemming from the Trump administration. This was in 2022 by Cambridge Associates senior investment director TJ Scavone, who said the negative side effects of QT would be felt once “something breaks.”

Market Reactions and Volatility

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 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.

Potential Impacts on the Crypto Market

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. Although the Fed hasn’t confirmed whether it will wind down its QT program, the outcomes of the January Federal Open Market Committee meeting revealed that some officials were concerned about balance sheet reductions impacting the government’s debt ceiling debate.

Broader Economic Context

Important policy changes at the Fed are coinciding with a broad pickup in the business cycle. As Cointelegraph recently reported, the economy has been in expansion mode for two consecutive months following more than two years of contraction. This economic recovery could further influence the Fed’s decision-making regarding QT.

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In conclusion, the sentiment on Polymarket suggests a strong belief in the Fed’s impending decision to end QT, which could serve as a significant turning point for the crypto market. As liquidity returns to the market, investors may find renewed confidence in risk assets, paving the way for a potential bull run.