This article is reprinted with permission from Phyrex_Ni, and the copyright belongs to the original author.
In the past week, the two most important events were the Federal Reserve's monetary policy in October and the results of the China-U.S. trade talks. From the final results, it should be considered more beneficial than harmful. First, regarding China-U.S. trade, although there are still some bumps, the latest trade framework has alleviated the potential market impact of tariffs. From this perspective, it is already a positive development, but this good news was anticipated by the market in advance, so its impact on risk markets is limited. However, for the short-term future, there is no need to consider the political implications of tariffs for now.
Secondly, regarding the Federal Reserve's monetary policy, this meeting almost confirmed last week's expectations. The Federal Reserve lowered interest rates by 25 basis points without data support and Powell announced that the balance sheet reduction would stop starting in December, rather than in October. This was all within our expectations. The only thing that exceeded expectations was Powell's firm belief that there would not be another rate cut in December, which raised the greatest concern in the market, worrying that the Federal Reserve has not entered a state of complete monetary easing.
But I do not share this view. The Federal Reserve has publicly stated that it will stop reducing the balance sheet starting in December, which itself is a signal of overall easing. After stopping the balance sheet reduction, the extraction of market liquidity will weaken, and the pressure on bank reserves will begin to ease. Even if QE (quantitative easing) is not immediately initiated in the future, it will lead the financial system to trend towards "liquidity easing." Powell's statement about not cutting rates in December is more to avoid excessive market trading on easing expectations, thereby raising the verbal intervention in financial conditions, and does not necessarily indicate a change in policy direction.
From a longer-term perspective, the combination of falling interest rates and stopping the balance sheet reduction means that the certainty of a loosening trend is already very high. The market is simply entering a phase of reality and expectation correction. Overall, this feels more like a correction of expectation differences rather than a change in macro direction. Meanwhile, the flow of funds also confirms this. Recently, there has been a historic outflow of funds from gold, which had previously surged in for four months and is now starting to withdraw. This usually indicates a renewed risk appetite, with funds flowing back from safe-haven assets to growth assets, including technology, semiconductors, and digital assets.
Although the short-term market may fluctuate due to unmet expectations, in the medium to long term, the easing path has gradually begun. The U.S. economy has not shown systemic contraction signals, and the policy environment still leans towards supporting asset prices. Therefore, I prefer to interpret this event as a period of oscillation and digestion as the market enters the early stages of easing rather than a risk escalation zone. The macro trend has not changed; it is just a temporary convergence of rhythm. As long as there are no significant systemic risks, risk assets still have a basis for continued performance.
What the market really needs to worry about, in my opinion, is not the remaining two months of 2025, but the intersection of policy and economy around 2026. The current market rhythm resembles the starting point of an easing cycle combined with the tail end of inflation, with a clear policy direction but a gentle pace. This means that short-term pullbacks and fluctuations are more about expectation management rather than a trend reversal. The current performance reflects this; although the market has been continuously adjusting downwards, there has not been any obvious negative information, but rather a natural calibration of market expectations. In the context where the funding structure has not significantly deteriorated, the policy direction has not reversed, and the fundamentals have not turned towards recession, I do not feel a very pessimistic sentiment.
Moving forward, what needs to be closely monitored is the change in bank reserves after the Federal Reserve stops reducing the balance sheet, the pace of U.S. Treasury bond issuance, and the possibility of a second inflation shock. If these three can maintain a stable balance, then the market's liquidity environment will continue to evolve towards easing, and asset prices will gradually reflect the upward drive brought by policy and cycles. Therefore, from an investment strategy perspective, I prefer to view the current stage as a buying opportunity rather than a point to exit. Of course, I may not be correct; this is my personal view, and for me, my plan has always been until 2028. In the meantime, while maintaining an optimistic outlook on Bitcoin, I am also prepared for additional purchases.
I believe it is more like the market is laying the groundwork for the next phase of liquidity switching rather than reaching a cyclical peak. Short-term fluctuations are a normal policy digestion period. As long as employment and economic activity do not experience severe deterioration, risk assets still possess structural opportunities, especially in technology and cryptocurrencies. The more cautious the market becomes due to short-term expectation corrections, the greater the elasticity when funds are repriced in the future. In summary, the macro events of the past week have not shown any obvious negative signals; monetary easing is inevitable, just a matter of time. Moreover, I am more concerned about the game between Trump and the Federal Reserve. Currently, Trump is still in a weak position; he needs to consolidate political capital, fulfill growth promises, and ensure market stability, which means his demand for a liquidity environment is no less than that of the market itself.
The Federal Reserve is not a monolith either. Powell will leave in May 2026, and the new Federal Reserve chair is almost certain to align more closely with the White House's economic strategy. This indicates that monetary policy will gradually transition from being inflation-focused to prioritizing growth and capital return. The pace of rate cuts may be significantly faster than now, with a greater emphasis on execution efficiency and market performance, and liquidity release may also be more proactive, with regulatory aspects potentially forming closer coordination with fiscal policy. Therefore, from my personal perspective, I believe Trump has not fully exerted his influence in the game with the Federal Reserve. If the current downturn is due to concerns about monetary policy, I believe Trump still has cards to play.
Aside from monetary policy and China-U.S. trade, I believe the market's game is also beginning to shift towards a government shutdown, especially as this week's decline is largely related to the shutdown. With the Senate's 14th rejection of the House version of the "temporary funding bill" (CR), the U.S. government's shutdown has now set a new historical record. The longest previous shutdown lasted 35 days during Trump's first term, and now it has reached day 36, with no clear expectation of when it will end. The longer the shutdown lasts, the more pronounced the fiscal vacuum effect becomes, with government wages and contract payments delayed, and cash flow transmitted to the market through residents and businesses. The first to feel the pressure is usually non-essential consumption, while the uncertainty of official data releases raises volatility premiums, shifting the market from data-driven to expectation-driven, with more frequent emotional fluctuations during the day.
The direct impact is that food stamp relief will only continue after Trump announces the government reopening, which may increase social unrest. Labor statistics data will not be released until the government shutdown ends. The Department of Transportation warns that if the shutdown continues and controllers remain in short supply, some airspace may be forced to close or traffic may be restricted next week. For the market, the impact is gradually accumulating in a pessimistic direction. The interruption of macro data means that the Federal Reserve and the market lack new economic information and can only price based on emotions and projections, leading to increased short-term volatility.
The combination of fiscal shutdown and pressure on people's livelihoods will weaken consumption expectations, posing potential pressure on the service industry and retail chain. Some regulatory agencies are operating at minimum capacity, with new issuances and approvals slowing down. Front-end trading in the capital market is normal, but back-end reviews are restricted. More critically, the longer the shutdown lasts, the more apparent the marginal tightening effect on financial conditions becomes. Investors will worry about fiscal execution risks and policy uncertainties, leading to increased cash demand and short-term benefits for safe-haven assets (short-term bonds, U.S. dollars), while the sentiment for growth assets and high-beta sectors will be more fragile.
Since a prolonged shutdown is equivalent to a short-term fiscal tightening, the market has turned to betting on whether monetary policy will become more dovish, speculating on expectations of interest rate declines and liquidity replenishment. However, Powell's statements are completely contrary to the current market expectations, leading to pessimism among investors. This is because the Treasury Department often speeds up bond issuance and raises the TGA to compensate for the fiscal vacuum, extracting funds from overnight repos or the banking system, which will affect price changes in risk markets.
Therefore, once the shutdown ends and temporary funding is implemented, the first occurrence will be the removal of negative factors, and uncertainty will begin to dissipate. The typical path for the market should be to first repair emotions and then look for fund replenishment. This is not a random guess; historical data shows that from 1995 to 1996, the U.S. government was shut down for 21 days, and the S&P rose about 4.0% in the month following the shutdown. In 2013, the U.S. government was shut down for 17 days, and a month later it rose about 4.5%. In the record 35-day shutdown from 2018 to 2019, the S&P rose 5% in the month after it ended. These historical data tell us that once the shutdown ends, the probability of a market rebound is very high.
In summary, since 1990, after six major shutdowns in the U.S., the S&P has averaged a 1% to 4% increase in one month and a 3% to 7% increase within three months, mainly due to the reduction of uncertainty after the shutdown and the return of fiscal funds, driving funds back from overnight repos or the banking side, amplifying the rhythm of first emotions and then funds. The current situation is actually very similar to 2013. After the end of the shutdown period, the S&P gained over 4% in price recovery within a month, and subsequently continued to rise over three months in conjunction with the restoration of fiscal payments, a slowdown in net supply of bills, and a decline in risk premiums.
In simpler terms, the current decline is a combination of multiple factors, which may include market panic over Powell's hawkish stance on not cutting rates, as well as the extraction of market liquidity due to the U.S. government shutdown. However, the shutdown has now exceeded the historical longest duration, and I believe the upcoming shutdown period will not be long. Once the shutdown ends, historically, there has almost never been a missed opportunity for risk markets to warm up, and there is currently no systemic risk in the risk market. I believe the probability of a correction in the U.S. stock market will be very high, and the correlation between cryptocurrencies, especially BTC, and technology stocks remains strong. It is also very likely that Bitcoin will rebound when technology stocks correct.
When might the shutdown end?
Although there is no clear timetable, based on current public information, if bipartisan negotiations in the Senate go smoothly, with some Democrats joining in support, the Republicans could reach 60 votes to pass the motion to end debate (cloture), allowing the funding bill to enter the final voting process. There are signs that moderates from both parties are communicating privately, so theoretically, a breakthrough could occur this week. If a framework is reached, the Senate could complete procedural voting within 1 to 2 days, followed by the House moving forward with the vote, and after the President's signature, the executive branch would gradually resume operations within 1 to 3 working days.
However, significant realities constrain both sides, as they still need to reach a consensus on spending levels and policy conditions (including healthcare subsidies). The procedural arrangements in the Senate and coordination with the House are also key. If negotiations get stuck on fiscal terms or political conditions, the shutdown could last for several weeks or even longer. Therefore, the most optimistic scenario is to reach an agreement this week and resume work next week. If this can be achieved, it would greatly help repair investor sentiment, as the current decline is mainly due to concerns about the continued extension of the shutdown, which puts pressure on society, the economy, and production.
2025 is coming to an end, and many market investors are predicting the trends for 2026. In the current situation, I divide 2026 into three timelines: the first is from January to May before Powell's departure, the second is from June when the new Federal Reserve chair takes office until the midterm elections in October, and the third is after the midterm elections in November.
The reason for this division is that in the first half of 2026, Powell's influence on monetary policy will still be primarily based on labor data and inflation, and the impact on the economy may not be very significant. It will be more data-driven. Although it will gradually move towards an easing path, it will inevitably be slower. According to the dot plot from September, it is very likely that under Powell's leadership, there will be no rate cuts in the first five months, or at most one cut. Of course, the dot plot in December will provide us with more information, but if the U.S. does not enter a recession, the unemployment rate is not very high, and inflation remains hesitant, then this will likely be the main line.
After June, the new Federal Reserve chair will inevitably be a loyalist of Trump, likely following Trump's plan for rapid interest rate cuts. For example, Milan, who is currently temporarily replacing Kugar, has called for a 50 basis point rate cut in both recent meetings, which aligns completely with Trump's strategy. Although Milan is currently the only one being so aggressive, Trump's camp still includes Bowman and Waller, which gives them four votes. The Federal Reserve's voting body consists of 12 members, so when Trump can secure more than half the votes, the pace will clearly change.
First, there will be control over the agenda and wording. Even with a moderate majority of just half the votes, the new chair can dominate the post-meeting statements and forward guidance, transforming the ongoing assessment of employment and inflation into a narrative that further easing will be pursued unless unexpected developments arise. Additionally, they can reinforce the narrative that real interest rates are too high and need to return to neutral quickly. Secondly, regarding the path of interest rate cuts, with the core votes of Milan, Bowman, Waller, and the new chair, it should not be difficult to garner 1 to 2 additional votes from the rotating regional Federal Reserve presidents (who are usually more sensitive to growth), forming a starting point of a 50 basis point cut, followed by a combination of 25 basis point cuts thereafter.
Moreover, if inflation indeed trends downward and labor data is not very friendly, it is not impossible to increase the rate cut intensity. After all, in Trump's view, the economy has always been the priority, and the issue of inflation may be postponed until after 2028. This period should represent the best expectations for the market, as the transition between the old and new Federal Reserve chairs is likely to mark the beginning of the U.S. entering a path of monetary easing.
Next up is the midterm elections. Historical data shows that both midterm and general elections significantly benefit risk markets. Although some investors question the performance of risk markets during the midterm elections in 2018 and 2022, from a macro perspective, both years were during the Federal Reserve's rate hike cycle, which had a substantial impact on liquidity. Even so, the U.S. stock market still saw decent gains after the midterm elections in 2022. The 2026 midterm elections are likely to coincide with the Federal Reserve's rate cut cycle, leading to a gradual release of liquidity and an increasing risk appetite among investors, combined with the added boost from the midterm elections, presenting good opportunities.
Looking back at on-chain data:
First, I am still most concerned about the stock data from exchanges. From the detailed data, as BTC prices fell during the week, the stock levels gradually increased, with all exchanges seeing an increase of 10,000 BTC. More specifically, the two exchanges with the largest holdings are Coinbase and Binance, which together account for about 60% of the total Bitcoin stock across all exchanges.
At Coinbase, the BTC stock has been declining alongside BTC prices, indicating that more U.S. investors are gradually buying BTC, especially during the first drop of BTC prices that week. In contrast, Binance's BTC stock has shown an upward trend, increasing by about 20,000 BTC, which suggests that investors on Binance are exhibiting more pronounced signs of panic selling, with some choosing to deposit their BTC into the exchange to seek an exit.
However, when looking at the annual data, we are still at the bottom of the overall exchange stock levels. My personal view on this drop is clear: it is most likely due to panic caused by the government shutdown and insufficient liquidity, rather than systemic risk. Once the shutdown ends, there is a high possibility that prices will rebound somewhat. Therefore, from the perspective of most investors' holdings, only about 10,000 BTC experienced panic, while the majority of holders remain calm.
Of course, in recent times, traditional investors have indeed slowed down their investments, and both BTC and ETH have encountered this issue. Data from the past week shows that the primary market for ETFs has been in a selling state for several consecutive working days. Although the selling volume is not large, detailed data indicates that BlackRock's investors have been leading the selling during these days. Historically, BlackRock's investors are long-term holders, so this situation likely indicates that some users are shifting from the cryptocurrency space to the U.S. stock market.
One of the historical data points that has not been proven wrong is the number of BTC held for over a year. This data has been emphasized repeatedly. From my observations over the past two years, a significant portion of long-term holders should be the BTC stock within exchanges. After all, in the past six months, the correlation with exchanges has been quite high. When I looked last week, it was not very clear; it could very well be accumulation, but it also resembles distribution, and it is precisely at a turning point. Now it is clearly in the distribution phase, and each time distribution occurs, it corresponds to a significant opportunity for BTC prices to rise.
I feel that the main reasons for this drop are the government shutdown and the panic triggered by Powell's statements, especially as the shutdown has broken historical records. I have previously discussed the impact of the shutdown on risk markets, so from my personal perspective, this drop feels more like an emotional reaction rather than a systemic risk.
From the data on open contracts, both BTC and ETH open contracts are beginning to increase, indicating that leveraged funds are starting to flow back, and market sentiment is gradually shifting from deleveraging to leveraging. Meanwhile, from the funding rates, the long side in the perpetual market is currently more crowded and has stronger demand, which means that sentiment is indeed starting to lean towards betting on price rebounds, with a willingness to pay to hold long positions. A positive funding rate does not mean everyone is going long; it represents that the demand for long leverage is greater than that for short leverage, indicating a more optimistic sentiment. Relatively speaking, ETH has a larger leverage increase, and the number of open contracts is higher, so when facing volatility, ETH's amplitude will be greater than BTC's.
Next, looking at the distribution of BTC holdings over the past month, we can see that investors holding more than 10 BTC have been steadfastly buying BTC regardless of price movements, especially increasing their buying intensity when BTC prices drop. In contrast, small-scale investors holding less than 10 BTC are more affected by price changes. Although there are attempts to buy the dip, when prices drop significantly, they often choose to panic sell first, leading to BTC flowing towards high-net-worth investors.
Finally, regarding the URPD data, although BTC has fallen below $100,000 and breached the support level of $104,500 to $111,000, the support level in this price range has not been broken. Even investors at a loss have not exhibited panic selling, and the overall distribution of chips remains very balanced. As long as the support level does not collapse, prices will generally return, which is a conclusion I have tracked over the past few years. This also serves as the basis for my personal buying strategy.
In summary, the biggest risk narrative this week is Powell's expectation of not cutting rates in December. However, the market still believes that Powell is merely speaking and that there will still be rate cuts in December. Currently, the CME's expectation for a rate cut in December remains nearly 74%.
In addition, the trade and tariff situation between China and the U.S. has reached a temporary pause. Although there may still be conflicts in the long term, the short-term negative impact on the market can be disregarded. The focus now should be on the end of the government shutdown, as the primary reason for this drop is the liquidity loss caused by the shutdown. We have also demonstrated through extensive data the market trends following a shutdown, so we should currently be in a "Buy the dip" phase, especially since there is no systemic risk present.
Related: Trump announces $2,000 tariff "bonus," how will this affect cryptocurrencies?
Original: “The Fed's Pivot and the U.S. Government Shutdown Signal Volatility Before Easing Cycle”
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