The Fed Balance Sheet Shrinkage Ready to Shake the Gold Market, Crypto Assets, and Bonds

If the US Federal Reserve shifts to a balance sheet reduction strategy, the global financial markets are likely to face a new wave of volatility. According to analysis by Damian Boey, portfolio strategy at Wilson Asset Management, this move will mark a significant turning point for capital flows and investor sentiment across various asset segments.

Clearer Fed Signal for Balance Sheet Reduction

Federal Reserve official Walsh has indicated support for lowering interest rates, but with specific conditions— the Fed’s balance sheet must be reduced first. This condition has sparked concerns across global markets, as investors begin to assess the serious implications of upcoming liquidity tightening.

Fundamentally, the shrinking of the Fed’s balance sheet means the loss of one of the main market supports that has been operating for years. The balance sheet expansion period has been a key engine pumping liquidity into the financial system, supporting asset supply and strengthening investor purchasing power.

Liquidity Threats to Alternative Assets

As the balance sheet begins to shrink, three asset categories will face significant selling pressure. Gold, as a traditional inflation hedge, may lose buying momentum from speculative capital inflows. Cryptocurrency, which is highly sensitive to global liquidity conditions, will also feel the direct impact of quantitative tightening. Meanwhile, bonds, especially in the wider credit spread segment, will experience repricing as investor expectations adjust.

Historically, quantitative tightening phases have always been difficult periods for high-risk assets and hedging instruments. When the dollar becomes scarcer, capital flows tend to exit speculative markets and return to safe assets.

Markets Becoming Sensitive to Fed Balance Sheet Conditions

Market dynamics have shifted fundamentally. Investors now pay attention not only to the Fed’s interest rate path but are much more sensitive to signals regarding the health of the balance sheet and overall liquidity conditions. Every comment about the potential reduction of the Fed’s assets triggers faster and more responsive market reactions than in previous periods.

This change in mindset reflects a deeper understanding of how the liquidity system works. The Fed’s expanding balance sheet has become a psychological foundation for markets over the past decade, and the prospect of its reduction now becomes a central factor in global investors’ risk assessments.