4E Labs | The End of Fed QT, Liquidity Restart, Bitcoin's Macro Pivot

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In the early hours of today Beijing time, the Federal Reserve announced a 25 basis point rate cut at the October FOMC meeting, lowering the federal funds rate target range to 3.75%--4.00%. This marks the second consecutive meeting of rate cuts, in line with market expectations.

At the same time, starting December 1, the Federal Reserve will cease the reduction of its balance sheet, which is currently being reduced by $5 billion in U.S. Treasuries and $35 billion in MBS each month. After that, the principal repayments of mortgage-backed securities will be reinvested in short-term government bonds.

Additionally, its chairman Jerome Powell pointed out that "whether to continue cutting rates in the future is not a predetermined path," emphasizing increased data dependence. The cessation of QT represents a potential signal for improved liquidity. For risk assets, the switch from "tight liquidity" to "neutral or loose liquidity" is particularly crucial.

（Federal Reserve original text: https://www.federalreserve.gov/newsevents/pressreleases/monetary20251029a.htm）

1. Rate Cut + Ceasing Balance Sheet Reduction

This rate cut fully aligns with market expectations. Weak employment data in September and a decline in inflation led the Federal Reserve to choose another slight rate reduction to address the risks of slowing economic momentum. However, the focus of the meeting, besides the rate cut itself, was also on the policy shift of "ceasing balance sheet reduction."

Two major signals:

• Interest rates were lowered: On October 29, 2025, the Federal Reserve lowered the federal funds target rate range by 25 basis points (to 3.75%--4.00%).
• Quantitative tightening is about to end: The Federal Reserve announced it will stop its three-year balance sheet reduction plan starting December 1 (i.e., stop actively "withdrawing liquidity").

In other words, the Federal Reserve is shifting from "rate hikes + balance sheet reduction" to "rate cuts + liquidity easing." The market typically views such a shift as a signal that risk assets (such as stocks and cryptocurrencies) may encounter a favorable environment.

2. Key Indicators: RRP Exhaustion and Reserve Boundaries

The three core variables measuring the liquidity of the financial system --- the Treasury General Account (TGA), overnight reverse repurchase agreements (ON RRP), and bank reserves --- are all pointing to a state of tension.

• ON RRP balance: Dropped from this year's peak of $460 billion to less than $6 billion, nearly exhausted;
• TGA balance: Rapidly increased to nearly $1 trillion since June, continuously absorbing market liquidity;
• Bank reserve ratio: Approximately 12.2%, close to the critical level before the "money shortage" in 2019.

In this context, if the balance sheet reduction continues, the liquidity of the banking system will be directly compressed.

Therefore, the Federal Reserve chose to "cease balance sheet reduction" at this juncture, which is both a risk prevention measure and a signal of proactive adjustment in the policy framework.

3. From "Price" to "Quantity": The Variables That Truly Affect the Market

Compared to nominal interest rates, the market is more concerned with changes in real yields and the total amount of liquidity.

Rate cuts change the price of funds, while ceasing balance sheet reduction changes the stock of funds. The former adjusts costs, while the latter determines supply. Historical experience shows that marginal changes in the balance sheet have a more significant impact on real yields, dollar flows, and risk appetite.

As of before the meeting:

• The 10-year TIPS real yield fell to 1.7%;
• The five-year forward inflation expectation stabilized at 2.2%;
• The dollar index dropped to around 99.

Falling real rates and a weaker dollar provide a solid foundational environment for global risk assets. Ceasing balance sheet reduction means that bank reserves will no longer decrease, and the marginal supply of dollars will rebound, allowing market liquidity to regain support. This change is the underlying logic behind the sustained strength of cryptocurrencies like Bitcoin throughout the year.

4. Crypto Market: Beneficiaries of Liquidity Signals

The core logic of Bitcoin has always been: the amount of 'liquidity' in the system determines the 'Bitcoin market.' Simply put:

• When the Federal Reserve prints money and eases (QE), Bitcoin rises;
• When the Federal Reserve reduces the balance sheet and tightens (QT), Bitcoin falls.

Over the past year, Bitcoin's price has shown a significant correlation with changes in the Federal Reserve's balance sheet. When liquidity expands, Bitcoin rises; when balance sheet reduction progresses, Bitcoin corrects. The announcement to cease balance sheet reduction at this meeting signifies a release of liquidity: dollar liquidity is flowing back, and bank reserves are increasing. Investors have more money to buy risk assets, such as Bitcoin, Ethereum, and stocks.

ETF funds have already reflected this expectation in advance. In the week before the October FOMC, U.S. spot Bitcoin ETFs saw a net inflow of $446 million, reversing the weak trend in the middle of the month. Historical data shows that ETF subscription volumes often significantly increase within 48 hours after FOMC meetings, indicating that institutional funds have begun to bet on the resumption of liquidity.

Against the backdrop of falling real rates, a weaker dollar, and a rebound in risk appetite, the crypto market is entering a new round of structural recovery.

5. Macroeconomic Outlook: From "Easing Trade" to "Recovery Trade"

In the short term, the possibility of pausing rate cuts in December has slightly cooled the "easing trade" sentiment;

However, from a medium-term perspective, as financing costs decline and manufacturing and real estate investments gradually recover, the "recovery trade" is taking over as the main line.

The rebound in U.S. PMI and existing home sales indicates that the economy is entering a mild recovery phase;

Continued fiscal and technology investments will drive the rebalancing of the credit cycle.

In this context, U.S. stocks remain resilient, the dollar may rebound in the short term, but will weaken in the long term.

6. Summary: Opportunities and Considerations

Unlike previous instances of simply "cutting rates," this time the Federal Reserve not only cut rates but also clearly ceased the reduction of its balance sheet (i.e., stopped actively "withdrawing liquidity"). This combination may provide a more lasting easing environment for the crypto market, rather than just a "short-term rebound." As mentioned above, many analyses point out that a key driver for Bitcoin is not the interest rate level itself, but rather real yields, dollar trends, and changes in the central bank's balance sheet. Therefore, if the Federal Reserve's new cycle truly shifts, cryptocurrencies may welcome a "second wave" of upward opportunities.

Current Opportunities and Strategic Recommendations (Not Investment Advice)

• Mid-term allocation opportunities: For investors bullish on Bitcoin/Ethereum, this policy shift provides a backdrop for improved liquidity expectations, serving as a window for positioning.
• Short-term cautious attitude: Due to ongoing market uncertainties (including the pace of rate cuts, lack of economic data, and regulatory risks), it is advisable to be alert to the risks of pullbacks or fluctuations.
• Focus on macro + regulatory dual tracks: Macroeconomic policy (interest rates, balance sheet reduction) is the first half, while regulatory policy (legitimacy of crypto assets, taxation, compliance of stablecoins) will become the second half.
• Sector rotation: If liquidity improves, DeFi, stablecoins, and institutional participation in crypto assets may benefit; however, if market risk appetite is suppressed, defensive strategies (traditional assets, stablecoins) may be safer.

Three Major Variables to Watch in the Future

1. The pace of the next rate cut/pause: If the Federal Reserve cuts rates again in December, the "easing cycle" is likely to be established; if it pauses or turns to a wait-and-see approach, the crypto market may be impacted.
2. Real yields and dollar trends: If the 10-year inflation-protected securities (TIPS) yield declines and the dollar index weakens, crypto assets are more likely to benefit.
3. Regulatory breakthroughs or headwinds: If the U.S. approves more crypto ETFs and clarifies stablecoin regulations, it would be structurally favorable; conversely, a tightening regulatory direction may suppress the market.