The Federal Reserve's Next Move: Beyond Interest Rates
Bitcoin and cryptocurrency markets are currently in a holding pattern after experiencing significant volatility, with BlackRock's CEO warning that conditions could deteriorate further.
Federal Reserve chair Jerome Powell is poised to begin growing the Fed's $6.6 trillion balance sheet—something that could lift stocks, crypto and the bitcoin price. (AFP via Getty Images)
Bitcoin's Current Struggle
The bitcoin price, which has declined compared to this time last year, has faced challenges since reaching its October peak of $126,000 per bitcoin. Traders are now preparing for potential market shocks in January, shifting their focus from the Federal Reserve's December interest rate decision to a potentially more significant factor: whether the Fed will begin expanding its $6.5 trillion balance sheet.
The Balance Sheet Question
Michael Kelly, global head of multi-asset at the $215 billion PineBridge Investments, highlighted the critical question facing markets: "Are they going to hold it flat or start growing it," referring to the Fed's balance sheet that has been reduced from over $9 trillion following the massive Covid-era expansion.
Bank of America strategists have made a bold prediction: the Fed will announce this week that it will grow its balance sheet by $45 billion per month starting in January. This would consist of $20 billion monthly for "natural balance sheet growth purposes" and another $25 billion monthly "to reverse the reserve over drain" for at least the first six months of 2026.
Quantitative Tightening's Impact
The Fed's quantitative tightening program, initiated in 2022, has successfully reduced the balance sheet from approximately $9 trillion to $6.5 trillion. This reduction has placed pressure on risk assets like bitcoin as the Fed attempted to withdraw liquidity from the financial system. The program concluded at the beginning of December.
Market Expectations and Risks
The market currently prices in a near-90% probability of the Fed cutting interest rates at the December Federal Open Market Committee (FOMC) meeting. However, Robin Singh, CEO of Koinly, notes that "the greater risk lies in deviation from expectations. Any surprise that runs counter to market assumptions could unsettle sentiment and trigger further downside."
Forward Guidance Matters
Nic Puckrin, investment analyst and co-founder of The Coin Bureau, observes that "the uncertainty with which bitcoin is hovering around the $90,000 mark reflects a prevailing fear that tomorrow's FOMC meeting will be somewhat of an anticlimax. Though a rate cut is now expected by nearly 90% of market participants and largely priced in, it's the forward guidance that matters."
The bitcoin price has fallen sharply since October as traders brace for a Federal Reserve game-changer that could blow up the bitcoin price, crypto and stock markets. (Forbes Digital Assets)
Long-Term Optimism Amid Short-Term Uncertainty
Despite current market apprehension, Cathie Wood, CEO of Ark Invest, recently reaffirmed her firm's long-term $1.5 million bitcoin price prediction, pointing to the Fed's easing liquidity conditions as a supportive factor.
Traders are now closely monitoring whether interest rates will continue to decline in early 2026, with the Fed's balance sheet decisions potentially having more significant implications for cryptocurrency markets than traditional interest rate moves.
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