Why the Fed balance sheet is lying to you about the next Bitcoin rally

On Sept. 16, the Federal Reserve tightened short-term monetary policy while leaving its reserve-management toolkit in place. The Federal Open Market Committee raised the federal-funds target range by a quarter point to 3.75%–4.00% and continued its policy of maintaining ample bank reserves.

The accompanying implementation directive set the interest rate paid on reserve balances at 3.90%, effective Sept. 17. It also retained conditional authority for the New York Fed trading desk to buy Treasury bills and, if needed, other Treasuries with no more than three years remaining to maintain ample reserves.

Each action serves a separate function. A higher administered rate transmits the tighter target range, while reserve-management authority supports the operating system used to keep overnight rates under control. Bitcoin liquidity depends on how those policies reach financial markets, beyond the size of the Fed's balance sheet.

How reserve plumbing differs from QE

QE is designed to ease monetary policy. It typically uses large-scale purchases of longer-term Treasuries and agency mortgage-backed securities to remove duration risk from private portfolios, press down on longer-term rates and loosen broader financial conditions.