Fed Balance Sheet Reduction Affects Momentum of Gold, Crypto, and Bonds

Along with speculation about the Federal Reserve’s next move, the global markets are now facing a new scenario that could simultaneously impact multiple asset classes. According to Damian Boey, portfolio strategist at Wilson Asset Management, higher volatility may soon emerge if the Fed shifts into a balance sheet reduction phase—a transition that has increasingly made investors wary of monetary policy signals.

Fed Policy Signals Trigger Liquidity Flow Concerns

Federal Reserve official Walsh has indicated support for interest rate cuts, but with a critical condition: balance sheet reduction must come first. This scenario creates uncertainty in the markets, as it influences investor expectations regarding the timing and magnitude of monetary stimulus. When the Fed begins liquidity tightening, it effectively removes one of the main foundations supporting market valuations. Repricing across various sectors becomes inevitable, as capital flows will adjust to the tighter liquidity conditions.

Investors are currently carefully evaluating what “balance sheet tightening” means for their portfolios. The Federal Reserve’s balance sheet reduction is not a trivial matter—it’s a real mechanism that will decrease the amount of money circulating in the global financial system, with impacts spreading across various investment instruments.

Three Risk Assets Most Vulnerable to Quantitative Tightening

Gold, cryptocurrencies, and bonds are three assets that traditionally benefit significantly from balance sheet expansion. When the Fed buys assets massively, liquidity is abundant, and investors seek yields in more speculative and alternative markets. However, this logic will reverse once the balance sheet reduction begins.

Gold, as a classic safe haven, will face selling pressure as investors seek profits in a repricing market. Cryptocurrencies, which rely on high-risk sentiment and capital flows, will be even more affected. Low-yield bonds will also lose relative appeal as liquidity shrinks and real yields start to rise.

Boey warns that this phase resembles previous quantitative tightening cycles: when the dollar becomes scarcer, capital flows from speculative markets will halt or even reverse. Inflation hedges will face the same pressures as high-risk assets, creating an uncommon convergence of selling.

Historical Pattern: When Liquidity Disappears, Volatility Surges

Market history shows that periods of quantitative tightening are always followed by increased volatility and significant repricing. During such times, there is no such thing as a “safe asset” in the short term—liquidity is king, and when capital flows slow, all instruments begin to be sold.

Current market conditions indicate heightened sensitivity to any signals from the Fed regarding liquidity, not just interest rates. Investors understand that balance sheet tightening affects market dynamics more deeply than what appears on the surface. With this background, markets will continue to monitor every Fed statement carefully to identify when the balance sheet reduction phase truly begins and how aggressively it will be implemented.