USA & Crypto Part 1: The Trump Victory and U.S. Monetary Policy Changes
Introduction: A New Era in Monetary Policy
Donald Trump’s unexpected victory in the 2024 U.S. Presidential Election marks a significant shift in the dynamics of U.S. monetary policy. This win not only reshapes political narratives but also redefines the power struggle between the Federal Reserve (Fed) and the U.S. Treasury. Trump’s policies are expected to challenge the Fed’s independence, with a greater focus on liquidity expansion and economic growth. These changes have the potential to disrupt global markets and influence risk assets such as equities and cryptocurrencies.
Conflict Between the Fed and the Treasury: A Battle for Control
Under Jerome Powell’s leadership, the Fed has pursued quantitative tightening (QT), withdrawing over $1 trillion in liquidity from financial markets. This effort is aimed at curbing inflation but clashes directly with the Treasury’s massive debt obligations, which now exceed $40 trillion. Janet Yellen’s Treasury has counteracted QT by issuing short-term Treasury bills, injecting liquidity back into the market.
This policy tug-of-war has destabilized financial expectations, creating uncertainty in markets. Trump’s administration is likely to amplify this conflict, pressuring the Fed to end QT prematurely and transition back to quantitative easing (QE). Such a shift could flood the markets with liquidity, boosting risk assets but also increasing financial instability.
Reverse Repo Market: A Key Pressure Point
The reverse repo (RRP) market plays a central role in managing liquidity. Currently, the Fed uses RRP to absorb excess cash, stabilizing the financial system. However, as RRP balances decline toward $200 billion, market instability becomes a significant risk. Yellen’s strategy of issuing short-term Treasury bills to counteract QT is reaching its limits.
If RRP balances drop too low, the Fed may be forced to halt QT and initiate QE to stabilize the Treasury market. Trump’s administration will likely encourage this transition to align with its pro-growth fiscal policies, driving substantial liquidity into markets and benefiting risk assets like cryptocurrencies.
Fiscal Policy Under Trump: Aggressive Growth and Liquidity
Trump’s administration is expected to pursue aggressive fiscal policies, including infrastructure investments and other large-scale spending initiatives. These measures require close collaboration between the Fed and the Treasury. However, Trump’s approach may place the Fed in a subordinate role, prioritizing Treasury objectives over monetary independence.
Given the Treasury’s heavy debt burden, sustaining QT or high interest rates is impractical. Trump will likely push the Fed to lower rates and resume QE, injecting massive liquidity into the financial system. This environment could drive significant growth in equities and cryptocurrencies, creating opportunities for investors.
Conclusion: Adapting to a Changing Financial Landscape
Trump’s presidency marks a pivotal shift toward a Treasury-led monetary policy framework. The end of QT and the potential resurgence of QE will inject liquidity into the markets, benefitting risk assets but also heightening financial instability. Investors should closely monitor these developments and adjust their strategies to capitalize on opportunities while mitigating risks.
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