Key conclusions:
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Federal Reserve balance sheet constraints and possible repo operations point to improving liquidity conditions that could boost Bitcoin and other risk assets.
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Fiscal pressure and sector weakness are currently weighing on markets, but easing tariffs and a targeted stimulus plan could support a recovery in demand for cryptocurrencies.
Bitcoin (BTC) and the broader crypto market could remain under pressure ahead of the upcoming US Federal Reserve interest rate decision on December 10. Expectations about the direction of monetary policy remain highly divided, with concerns about inflation clashing with signs of slowing economic activity.
Traders were split between a 0.25% cut and holding rates steady at 4%, based on the implied outlook for government bond markets. The Fed’s more cautious members argue that US President Donald Trump’s tariffs have increased inflationary pressures, reducing room for rate cuts and supporting growth. At the same time, the US labor market is showing clear signs of cooling, according to to reports from BlackRock.
Blaming the Fed for Bitcoin’s weakness seems wrong
Fed officials have regularly cited concerns about sticky inflation. “I worry that tight monetary policy is weighing on the economy, especially how it affects lower- and middle-income consumers,” Fed Governor Christopher Waller he said on Monday. Waller dismissed rumors that the missing official data, resulting from the government shutdown, has hurt the Fed’s visibility.
Still, blaming the Fed alone for Bitcoin’s weakness seems inaccurate, given that the downtrend began in early October. US import tariffs helped reduce the monthly government deficit and the Fed’s balance sheet continued to shrink, causing the US dollar to strengthen against a basket of major currencies. Historically, Bitcoin has an inverse correlation with the Dollar Index (DXY).
It is almost impossible to pin down the exact trigger behind Bitcoin’s weakness since the October 6 record high. Financial conditions worsened as freight traffic slowed, the real estate market softened and companies faced reduced cash flow, according to Savvy Wealth report. As a result, Bitcoin’s decline could stem more from widespread risk aversion than dollar strength alone.
The Fed has signaled that it will no longer allow its assets under management to fall below the current $6.5 trillion starting in December. This move could be offset by the launch of repo operations (Repo). In practice, the Fed’s balance sheet remains unchanged while cash is injected into financial markets, alleviating liquidity concerns by adding reserves to banks.
Meanwhile, Trump ordered US Treasury Secretary Scott Bessent to prepare a stimulus campaign targeting lower-income households to begin in 2026, and import tariffs could be gradually reduced to reduce inflation risks. However, fiscal conditions worsen in 2026 when the One Big Beautiful Bill takes effect.
Bitcoin could recover strongly as liquidity eventually returns
By the start of the year, there should be far less uncertainty in the economic outlook, for better or for worse. Weaknesses are currently evident in the real estate and automotive sectors, both of which are putting significant pressure on regional banks. Bitcoin and other riskier assets have already reacted defensively, but they will benefit the most when liquidity returns.
Related: Bitcoin charts a bottom of $75k, but analysts predict a 40% rise before the end of 2025.
Bitcoin is not hostage to US monetary policy, especially with the weakening labor market. The Fed has limited room for maneuver while fiscal conditions remain tight, leaving expansionary measures as a fallback. Over time, liquidity is expected to return to the markets, helping to soften the harsher economic impact and creating a more favorable environment for strong growth in scarce assets.
This article is for general information purposes and is not intended and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are solely those of the authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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