Here’s why Bitcoin price could correct after the US government resolves the debt limit impasse

For much of 2022, the crypto market focused on the U.S. Federal Reserve’s actions. The central bank created a bearish environment for risk-on assets like stocks and cryptocurrencies by increasing the interest rates on borrowing. 

Toward the end of 2022, positive economic data, healthy employment numbers and a decreasing inflation rate provided hope that a much-awaited slowdown in the rate of interest rate hikes would occur. Currently, the market expects the rate hikes to reduce from 50 basis points (bps) to 25 bps before the complete end of the hike regime by mid-2023.

From the perspective of the Fed’s goal of constraining liquidity and providing headwinds to an overheated economy and stock market, things are starting to improve. It appears that the Fed’s plan of a soft-landing by quantitative tightening to curb inflation without throwing the economy into a deep recession might be working. The recent rally in stock markets and Bitcoin can be attributed to the market’s trust in the above narrative.

However, another essential American agency, the U.S. Treasury, poses significant risks to the global economy. While the Fed has been draining liquidity from the markets, the Treasury provided a countermeasure by draining its cash balance and negating some of the Fed’s efforts. This situation may be coming to an end.

It invokes risks of constrained liquidity conditions with the possibility of an adverse economic shock. For this reason, analysts warn that the second half of 2023 may see excess volatility.

Backdoor liquidity injections negate the Fed’s quantitative tightening

The Fed started its quantitative tightening in April 2022 by increasing the interest rates on its borrowings. The aim was to reduce inflation by constraining the market’s liquidity. Its balance sheet shrank by $476 billion during this period, which is a positive sign considering that inflation dropped and employment levels stayed healthy.

However, during the same time, the U.S. Treasury used its Treasury General Account (TGA) to inject liquidity into the market. Typically, the Treasury would sell bonds to raise additional cash to meet its obligations. However, since the nation’s debt was close to its debt ceiling level, the federal department used its cash to fund the deficit.

Effectively, it’s a backdoor liquidity injection. The TGA is a net liability of the Fed’s balance sheet….