The Federal Reserve’s balance sheet saw a surge of almost $94.5 billion as of March 22, marking a $297 billion increase from the previous week when the banking crisis began. The total liabilities of the central bank increased by $393 billion in the past two weeks, bringing it to $8.734 trillion, close to the all-time high of $8.95 trillion a year ago. The Fed’s quantitative tightening program, which reduced assets by $600 billion, was responsible for the all-time high. The announcement of the data on March 23 coincided with a 5.5% increase in the price of Bitcoin to $29,000.
Speculations were rife that the Fed’s expanding balance sheet was due to quantitative easing (QE). However, the central bank did not utilize new dollar reserves to purchase long-term treasuries, but instead reduced its U.S. Treasury holdings by $3.5 billion to $7.937 trillion. This suggests that quantitative tightening is still being employed to curb inflation.
The Fed’s balance sheet grew as a result of short-term loans dispatched to the ailing banking sector. The usage of the “discount window” that helps commercial banks manage short-term liquidity needs was reduced by $42 billion, while the same amount was allocated to the new Bank Term Funding Program (BTFP). The remaining $60 billion went to the Fed’s swaps facility, which provides liquidity to offshore banks.
The Fed’s tightening policy and lending facilities to regional and offshore banks could potentially cause a drying up of cash liquidity, boosting the dollar’s valuation versus other top foreign currencies. This, in turn, could push Bitcoin’s price lower in the short term. The U.S. dollar index has already gained 1.5% since the Fed’s balance sheet update.
The ongoing credit crisis may not have peaked despite the Fed’s emergency lending of $393 billion to banks, as per Janet Yellen’s outlook on depositors’ insurance. Yellen confirmed on March 21 that uninsured depositors over $250,000 would be protected “if smaller institutions suffer deposit runs.” However, the next day, she stated to the Senate that she had not considered “blanket insurance or guarantees of deposits,” which caused bank stocks to plummet. Yellen then stated on March 23 that the authorities “would be prepared to take additional actions if warranted.”
If emergency lending facilities keep increasing after more bank collapses, QE will become inevitable, similar to what happened after the 2008 global financial crisis. An expanding balance sheet, with or without QE, has been bullish for crypto in the past, and this correlation could continue if the banking crisis deepens.