Affected by the minutes of the October meeting and Powell's previous hawkish statements, the market was generally expecting that the Federal Reserve would not cut interest rates in December last week, leading to a significant market correction. However, just three days later, market sentiment underwent a 180-degree reversal. Powell's "allies" began to speak out intensively to build momentum for a rate cut in December, reflecting an increasing divergence of opinions within the Federal Reserve, reaching the highest level during Powell's eight-year tenure.
Under the expectation of a rate cut, U.S. stocks and risk assets experienced a short-term rebound, bond markets stabilized, and cryptocurrencies saw a brief recovery after a significant correction, but overall still faced downward pressure and high volatility.
At the October monetary policy meeting, the Federal Reserve lowered the policy interest rate by 25 basis points to 3.75%-4.00%. However, Chairman Powell's subsequent speech was unusually hawkish, stating that in the context of a strong economy, the Federal Reserve was not in a hurry to cut rates. The minutes released afterward further reinforced this tone. This sentiment was reflected in the money market, where the expected federal funds rate before 2026 rose back above 3%, and the probability of a rate cut in December plummeted from 90% before Powell's speech to 40% last Thursday (November 20).
However, last Friday, New York Fed President John Williams bluntly stated that rates could be cut "in the near term." According to the latest data from CME Fedwatch, the market's bet on the Federal Reserve cutting rates by 25 basis points in December has risen to 81.1%.
Goldman Sachs Chief Economist Jan Hatzius stated in a report: "We expect the Federal Reserve to cut rates again in December, followed by additional cuts in March and June 2026, bringing the federal funds rate down to 3-3.25%." He also pointed out that due to favorable fundamental inflation information, the risk of rate cuts next year is increasing.
Joachim Klement, an investment strategist at the UK's largest independent investment bank Panmure Liberum, noted in an analysis that political pressure from the White House is continuously accumulating. If history is any guide, the U.S. economy may experience a brief but intense "sugar rush" stimulus in 2026.
According to a scholarly paper by University of Maryland economist Thomas Drechsel, the political influence and interaction between the president and the Federal Reserve chairman since 1933 have often led to a more accommodative monetary policy. The study also measured the impact of political intervention on economic growth and inflation in the following years.
Based on this, it can be estimated that under the current political pressure, the Federal Reserve may further lower the policy interest rate.
Assuming the current level of political pressure is roughly equivalent to Nixon's influence on Fed Chairman Burns in 1971 (though some believe Trump's pressure on Powell was even greater), the Federal Reserve may cut rates by an additional 1.0 to 1.5 percentage points over the next 12 months beyond what is needed based on economic fundamentals.
In other words, if the Federal Reserve continues to prioritize employment over price stability under pressure, as it has done historically, the federal funds rate could fall below 3% next year. After Trump appoints the next chairman, the Fed's tendency to yield to political pressure may become more pronounced.
In the short term, this could boost U.S. real GDP growth over the next 1-2 years; however, the bad news is that such stimulus is often a temporary "sugar high" effect, and once rate cuts stop, growth will quickly decline.
Research shows that politically driven aggressive rate cuts, while unable to deliver sustained long-term economic growth, often leave a lasting inflationary impact.
The reason is that when the market doubts the independence of the central bank, inflation expectations are more likely to rise, leading to an overheating economy. Ultimately, the Federal Reserve may be forced to raise rates significantly again to "hit the brakes," creating a vicious cycle.
Of course, none of this is predetermined.
Powell and several officials still emphasize the independence of the Federal Reserve. If the U.S. economy shows a significant slowdown in the coming months, aggressive rate cuts may align with economic logic and not lead to excessive inflation. More dovish officials, such as Stephen I. Miran, also believe that faster rate cuts may be necessary.
However, the lessons from history are very clear: implementing aggressive rate cuts while inflation is still at 3% and economic growth is close to 4% is a highly risky policy experiment.
Under optimistic expectations for rate cuts, the cryptocurrency market has clearly stabilized, with the total market capitalization rising by 1.5% to $2.98 trillion. According to CoinMarketCap data, as of Tuesday at 6 PM, Bitcoin was priced at $86,684, with a 24-hour increase of 0.89%; Ethereum (ETH) rose by 2.78% to $2,870, and Solana increased by 5.11% to $135. However, the brief recovery does not mean that the challenges facing the crypto market have been resolved, as analysts point out that this month's decline has exposed three core issues facing Bitcoin.
Increased outflow from Bitcoin ETFs
Markus Thielen, founder and CEO of 10X Research, stated that outflows from Bitcoin exchange-traded funds (ETFs) in November have reached $3.5 billion, the largest since February of this year. He noted, "This indicates that institutional investors have stopped allocating to Bitcoin, and these ETFs have become sellers. As long as they continue to sell, the market will struggle to maintain a rebound or increase."
Slowdown in stablecoin minting and increased outflows
Thielen also pointed out that the slowdown in stablecoin minting activities may indicate a reduction in funds entering the crypto market. According to his data, approximately $800 million flowed from crypto assets back to fiat currency last week. Although the scale is not large, it further shows that funds are not staying in the market.
Stablecoins are a type of cryptocurrency that is pegged to other assets (usually the U.S. dollar) and provides a safe haven during market volatility. After last month's historic crash in the crypto market, the market capitalization of stablecoins had once risen. However, according to DeFiLlama data, as of November 1, the total market capitalization of stablecoins has decreased by $4.6 billion.
Thielen said, "Funds are not only not entering the market but are also continuously flowing out. This is also the reason why Bitcoin's market share has not increased."
Selling pressure from long-term holders remains
The third challenge is that long-term holders have begun to sell during the downturn, possibly anticipating Bitcoin's historical four-year cycle. The performance of Bitcoin from peak to trough is often closely related to the halving event that occurs every four years. However, many investors are now skeptical about whether this trajectory will repeat.
Nicolai Sondergaard, a research analyst at blockchain analytics firm Nansen, stated, "In every cycle, old players will sell. I think at some point, they will feel, 'Maybe I've been in this long enough, and it's time to use this money for something else.'"
Related: BitMine, Strategy, SharpLink stocks outperform crypto market recovery
Original article: “The Sugar Rush Effect on the Horizon? Crypto Markets Still Face Challenges Amid Fed's Rate Cut Prospects”
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