Interest rate hike 0.25% but expansion: Fed balance sheet growth is not beneficial to Bitcoin

According to Woofun AI, on September 16, the Federal Reserve kept its reserve management strategy unchanged while tightening short-term monetary policy. This seemingly contradictory operation triggered a misinterpretation of liquidity expansion in the Bitcoin market. Despite the growing trend in the size of the Federal Reserve's balance sheet, its core driving force is not quantitative easing aimed at easing financial conditions, but rather to ensure that the banking system has sufficient reserves in the context of interest rate hikes. This misalignment between policy intentions and changes in asset size has led the market to misinterpret short-term treasury bond purchases as a favorable signal for risky assets such as Bitcoin, thereby ignoring the essence of austerity brought about by rising interest rates.

At its September 16 meeting, the Federal Open Market Committee decided to raise the federal funds target interest rate range by 0.25 percentage points to 3.75% — 4.00%, and continue to implement the policy framework for maintaining sufficient bank reserves. As of September 17, the interest rate on reserve balances was set at 3.90%.

At the same time, the New York Federal Reserve trading department was given the power to buy US Treasury short-term treasury bonds and other treasury bonds remaining for no more than three years if necessary to ensure an adequate level of reserves. This mechanism is fundamentally different from traditional quantitative easing (QE): QE aims to eliminate long-term risks in private portfolios and reduce long-term interest rates through large-scale purchases of long-term US Treasury bonds and mortgage-backed securities, thereby easing financial market tension; while reserve management purchases are only used to control overnight interest rates without changing monetary policy positions. Federal Reserve Vice Chairman Jefferson clearly distinguished the two in January, pointing out that quantitative easing is a stimulus tool, while reserve management purchases are only a means of maintaining reserves. Roberto Perley, head of marketing at the New York Federal Reserve, also emphasized that all of the 2026 reserve management purchases were short-term treasury bonds, which is completely different from long-term treasury bond purchases that ease market tension.

This division of labor explains why the size of the Federal Reserve's assets can continue to grow when monetary policy tends to be tight, because changes in its balance sheet record changes in the central bank's assets and liabilities, and the intention, duration, and transmission effects of the purchase determine the true meaning of these changes to monetary policy.

According to data compiled by Woofun AI, the September order continues the reserve management purchase plan launched in December 2025, but the New York Federal Reserve clearly stated that there are no fixed rules for such purchases. The current rules are that no new reserve management purchases will be made from September 15 to October 14, but there is also a US Treasury short-term treasury bond purchase plan of about $15.6 billion. These funds come from repayment of the principal amount of institutional securities and are a reinvested capital flow separate from net reserve management purchases. Although the New York Federal Reserve trading department has the power to buy short-term treasury bonds, it is currently not using this power to inject net reserves.

According to the Federal Reserve's “Monetary Policy Report”, as of July 1, the system's open market accounts had purchased nearly $250 billion of US Treasury short-term treasury bonds since the beginning of January, of which approximately $160 billion came from reserve management purchases and $90 billion from reinvestment in institutional securities. During this period, the total assets of the Federal Reserve increased by $151 billion, and the reserve balance increased by $54 billion. According to the latest H.4.1 data, as of September 9, the total assets of the Federal Reserve were 6.740,619 trillion US dollars, an increase of 3.415 billion US dollars over the previous week, and an increase of 134.657 billion US dollars over the same period last year.

These figures reflect balance sheet size and trends, but quantitative easing is determined by policy intent and composition. Under the framework of sufficient reserves, the Bitcoin market was pressured to raise interest rates by 0.25 percent. On September 15, the secured overnight financing rate was 3.64%, and the actual federal funds rate was 3.63%, which is very close to the reserve balance interest rate of 3.65%. The demand for overnight reverse repurchase operations was about 700 million US dollars, proving that the Federal Reserve still controls overnight interest rates.

Although cryptocurrency market data can reflect the current situation, it cannot be used as direct evidence of policy transmission effects. According to Bitcoin market data released by CryptoSlate, the price of the currency was around $76,044, up 0.13% in 24 hours; while Farside Investors statistics showed a net outflow of $450.4 million in the US market on September 15. There is currently no evidence that the Fed's decisions directly led to these market changes. The future growth of the Fed's balance sheet should first be judged based on policy design. Key criteria include the purpose, size, and term structure of the announcement, and whether the New York Federal Reserve plans to make net reserve management purchases.

Easing measures aimed at eliminating significant long-term risks are fundamentally different from buying short-term treasury bonds just to maintain reserves. For Bitcoin, only when the long-term financial market environment becomes more relaxed and demand for cryptocurrencies rises accordingly will it be a strong sign of improved liquidity. Looking at it now, the measures taken on September 16 are actually implementing a tighter monetary policy by maintaining sufficient reserves. Applying the quantitative easing concept to this is a confusing function and overestimates the real impact of the Federal Reserve on the Bitcoin market.