Key Points:
The Federal Reserve's balance sheet size is constrained and may initiate repurchase operations, indicating that the liquidity environment is improving, which is expected to boost risk assets like Bitcoin.
Fiscal pressures and weakness in certain industries are currently dragging down market performance, but tariff reductions and targeted stimulus plans may help revive crypto demand.
Ahead of the upcoming Federal Reserve interest rate decision on December 10, Bitcoin and the broader crypto market may continue to face pressure. The direction of monetary policy is expected to be highly divergent, with inflation concerns conflicting with signs of slowing economic activity.
According to the implied probabilities in the Treasury market, traders show a clear divide between a 0.25% rate cut and maintaining the 4% rate. More cautious Federal Reserve members believe that the tariffs implemented by President Trump have increased inflationary pressures, thereby limiting the space for rate cuts and support for growth. Additionally, a report from BlackRock indicates that there are clear signs of cooling in the U.S. job market.
Federal Reserve officials frequently express concerns about stubborn inflation. "I worry that tightening monetary policy is affecting the economy, especially for middle- and low-income consumers," said Federal Reserve Governor Christopher Waller on Monday. Waller denied rumors that the government shutdown has led to missing official data, thereby affecting the Fed's judgment.
However, attributing Bitcoin's decline solely to the Federal Reserve is not accurate, as the downward trend began in early October. U.S. import tariffs have helped narrow the monthly fiscal deficit, and the Federal Reserve's balance sheet continues to shrink, strengthening the dollar against a basket of major currencies. Historically, Bitcoin has shown an inverse correlation with the U.S. dollar index (DXY).
Since reaching an all-time high on October 6, the specific triggers for Bitcoin's weakening are nearly impossible to pinpoint. According to a report from Savvy Wealth, as freight activity slows, the real estate market weakens, and corporate cash flow tightens, overall financial conditions are deteriorating. Therefore, Bitcoin's decline is more a result of overall risk aversion rather than just a strong dollar.
The Federal Reserve has indicated that starting in December, its managed assets will not fall below the current $6.5 trillion. This move may balance through the initiation of repurchase agreement (Repo) operations. In practice, the Federal Reserve's balance sheet remains unchanged while injecting cash into the financial markets, alleviating liquidity pressures by increasing bank reserves.
Meanwhile, Trump has instructed U.S. Treasury Secretary Scott Bessent to prepare a stimulus plan aimed at low-income households for early 2026 and may gradually reduce import tariffs to mitigate inflation risks. However, with the One Big Beautiful Bill Act coming into effect, the fiscal situation in 2026 will further deteriorate.
By early next year, regardless of the outcome, the uncertainty surrounding the economic outlook will significantly decrease. Currently, both the real estate and automotive industries are showing clear signs of weakness, putting immense pressure on regional banks. Bitcoin and other high-risk assets have adopted a defensive posture, but once liquidity returns, they are also expected to benefit the most.
Bitcoin is not entirely constrained by U.S. monetary policy, especially in the context of a weakening job market. When fiscal conditions remain tight, the Federal Reserve has limited operational space, making expansionary measures a backup option. Over time, liquidity is expected to return to the market, helping to mitigate more severe economic shocks and creating a more favorable environment for significant price increases in scarce assets.
Related: Stablecoin giant Tether has invested in Ledn, targeting the global cryptocurrency lending market.
Original: “Bitcoin (BTC) Expected to Recover as Liquidity Conditions Change, but U.S. Macro Risks Remain”
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