I. Federal Reserve Rate Cut: The Path to Easing After Rate Reduction

On December 11, the Federal Reserve announced a rate cut of 25 basis points as expected. On the surface, this decision was highly consistent with market expectations and was even interpreted as a signal that monetary policy was beginning to shift towards easing. However, the market's reaction quickly turned cold, with U.S. stocks and crypto assets declining in tandem, and risk appetite clearly contracting. This seemingly counterintuitive trend actually reveals a key fact in the current macro environment: a rate cut does not equate to liquidity easing. During this round of Super Central Bank Week, the message conveyed by the Federal Reserve was not "reintroducing liquidity," but rather a clear constraint on future policy space. From the details of the policy, changes in the dot plot have caused a substantial impact on market expectations. The latest forecasts indicate that the Federal Reserve may only implement one rate cut by 2026, significantly lower than the 2 to 3 cuts previously priced in by the market. More importantly, among the 12 voting members in this meeting, 3 explicitly opposed the rate cut, with 2 advocating for maintaining the current rate. This divergence is not mere fringe noise; it clearly indicates that the Federal Reserve's internal vigilance regarding inflation risks is much higher than the market previously understood. In other words, this rate cut is not the starting point of an easing cycle, but rather a technical adjustment to prevent financial conditions from tightening excessively in a high-rate environment.

For this reason, what the market truly anticipates is not a "one-time rate cut," but a clear, sustainable, and forward-looking easing path. The pricing logic of risk assets does not rely on the absolute level of current rates, but rather on the discounted future liquidity environment. When investors realize that this rate cut has not opened up new easing space, but may instead lock in future policy flexibility prematurely, the original optimistic expectations are quickly revised. The signals released by the Federal Reserve are akin to a "painkiller," temporarily alleviating tension but not changing the underlying issue; at the same time, the restrained stance revealed in the policy outlook forces the market to reassess future risk premiums. In this context, the rate cut has become a typical case of "good news fully priced in." The long positions built around easing expectations began to unwind, with high-valuation assets being the first to feel the pressure. Growth sectors and high-beta segments in U.S. stocks were the first to come under pressure, and the crypto market was no exception. The pullback in Bitcoin and other mainstream crypto assets was not due to a single negative factor, but rather a passive reaction to the reality that "liquidity will not return quickly." As futures basis converged, marginal ETF buying weakened, and overall risk appetite declined, prices naturally gravitated towards a more conservative equilibrium level. Deeper changes are reflected in the shifting risk structure of the U.S. economy. Increasingly, research indicates that the core risk facing the U.S. economy in 2026 may no longer be a traditional cyclical recession, but rather a demand-side contraction directly triggered by a significant correction in asset prices. After the pandemic, the U.S. has seen a group of about 2.5 million "excess retirees," whose wealth is highly dependent on the performance of the stock market and risk assets, creating a highly correlated relationship between their consumption behavior and asset prices. Once the stock market or other risk assets experience a sustained decline, the consumption capacity of this group will contract in tandem, creating negative feedback on the overall economy. In this economic structure, the Federal Reserve's policy choices are further constrained. On one hand, persistent inflationary pressures remain, and premature or excessive easing could reignite price increases; on the other hand, if financial conditions continue to tighten and asset prices undergo a systemic correction, it could quickly transmit to the real economy through the wealth effect, triggering a decline in demand. The Federal Reserve thus finds itself in an extremely complex dilemma: continuing to suppress inflation could trigger a collapse in asset prices, while tolerating higher inflation levels could help maintain financial stability and asset prices.

An increasing number of market participants are beginning to accept a judgment: in future policy games, the Federal Reserve is more likely to choose to "protect the market" at critical moments rather than "protect inflation." This means that the long-term inflation anchor may shift upward, but the release of liquidity in the short term will be more cautious and intermittent, rather than forming a sustained wave of easing. For risk assets, this is an unfriendly environment— the speed of rate declines is insufficient to support valuations, while the uncertainty of liquidity persists. It is against this macro backdrop that the impact of this round of Super Central Bank Week extends far beyond a single 25 basis point rate cut. It marks a further correction in market expectations of the "era of unlimited liquidity" and lays the groundwork for the subsequent interest rate hike by the Bank of Japan and liquidity contraction at the end of the year. For the crypto market, this is not the end of the trend, but a critical phase that necessitates recalibrating risks and reinterpreting macro constraints.

II. Bank of Japan Rate Hike: The True "Liquidity Demolition Expert"

If the Federal Reserve's role during Super Central Bank Week was to lead the market to disappointment and correction regarding "future liquidity," then the action the Bank of Japan is set to take on December 19 is more akin to a "demolition operation" that directly impacts the underlying structure of global finance. The current market expectation for the Bank of Japan to raise rates by 25 basis points, increasing the policy rate from 0.50% to 0.75%, is approaching 90%. This seemingly mild rate adjustment signifies that Japan will push its policy rate to the highest level in thirty years. The key issue is not the absolute value of the rate itself, but the chain reaction this change will cause in the logic of global capital flows. For a long time, Japan has been the most important and stable source of low-cost financing in the global financial system; once this premise is broken, its impact will far exceed that of the Japanese domestic market.

Over the past decade, a nearly default structural consensus has formed in global capital markets: the yen is a "permanent low-cost currency." Supported by a long-term ultra-loose policy, institutional investors can borrow yen at near-zero or even negative costs, then convert it into dollars or other high-yield currencies to allocate to U.S. stocks, crypto assets, emerging market bonds, and various risk assets. This model is not a short-term arbitrage but has evolved into a long-term funding structure worth trillions of dollars, deeply embedded in the global asset pricing system. Because of its prolonged duration and high stability, yen carry trades have gradually shifted from being a "strategy" to a "background assumption," rarely priced as a core risk variable by the market. However, once the Bank of Japan clearly enters a rate hike path, this assumption will be forced to reevaluate. The impact of a rate hike goes beyond the marginal increase in financing costs; more importantly, it will change market expectations regarding the long-term direction of the yen's exchange rate. When the policy rate rises and inflation and wage structures change, the yen will no longer just be a passive depreciating financing currency, but may transform into an asset with appreciation potential. Under this expectation, the logic of carry trades will be fundamentally disrupted. The capital flows originally centered on "interest rate differentials" will begin to incorporate "exchange rate risk," rapidly deteriorating the risk-return profile of funds.

In this situation, the choices facing arbitrage funds are not complex but highly destructive: either close positions early to reduce exposure to yen liabilities, or passively endure the dual pressure of exchange rates and interest rates. For large-scale, highly leveraged funds, the former is often the only viable path. The specific way to close positions is also very direct—selling off held risk assets, converting back to yen to repay financing. This process does not distinguish between asset quality, fundamentals, or long-term prospects, but aims solely to reduce overall exposure, thus exhibiting a clear "indiscriminate sell-off" characteristic. U.S. stocks, crypto assets, and emerging market assets often come under pressure simultaneously, forming a highly correlated decline. History has repeatedly validated the existence of this mechanism. In August 2025, the Bank of Japan unexpectedly raised the policy rate to 0.25%. This magnitude is not considered aggressive in the traditional sense, yet it triggered a violent reaction in global markets. Bitcoin fell 18% in a single day, and various risk assets faced simultaneous pressure, with the market taking nearly three weeks to gradually recover. The intensity of that shock was due to the suddenness of the rate hike, forcing arbitrage funds to quickly deleverage without preparation. The upcoming December 19 meeting is different from that previous "black swan" event; it resembles a "gray rhino" that has revealed its presence in advance. The market has already anticipated the rate hike, but the expectation itself does not mean that risks have been fully digested, especially in the context of a larger rate hike combined with other macro uncertainties.

What is even more concerning is that the macro environment in which this rate hike by the Bank of Japan occurs is more complex than in the past. Major global central bank policies are diverging; the Federal Reserve is nominally cutting rates while tightening future easing space in expectations; the European Central Bank and the Bank of England are relatively cautious; while the Bank of Japan has become one of the few major economies to clearly tighten policy. This policy divergence will exacerbate the volatility of cross-currency capital flows, making the unwinding of carry trades not a one-time event, but potentially a phased and recurring process. For the crypto market, which is highly dependent on global liquidity, the continued presence of this uncertainty means that the central tendency of price fluctuations may remain elevated for some time. Therefore, the Bank of Japan's rate hike on December 19 is not merely a regional monetary policy adjustment, but a significant node that could trigger a global capital structure rebalancing. What it "demolishes" is not the risk of a single market, but the long-accumulated assumption of low-cost leverage in the global financial system. In this process, crypto assets often bear the brunt of the impact due to their high liquidity and high beta characteristics. This impact does not necessarily mean a reversal of long-term trends, but it is almost certain to amplify volatility, depress risk appetite in the short term, and force the market to reassess the funding logic that has been taken for granted over the past several years.

III. Christmas Holiday Market: The Underestimated "Liquidity Amplifier"

Starting December 23, major institutional investors in North America gradually enter Christmas holiday mode, and the global financial market subsequently enters the most typical and easily underestimated liquidity contraction phase of the year. Unlike macro data or central bank decisions, holidays do not change any fundamental variables, but they significantly weaken the market's "absorption capacity" for shocks in a short period. For crypto assets, which are highly dependent on continuous trading and market-making depth, this structural decline in liquidity is often more destructive than a single negative event. In a normal trading environment, the market has sufficient counterparties and risk absorption capacity. A large number of market makers, arbitrage funds, and institutional investors continuously provide two-way liquidity, allowing selling pressure to be dispersed, delayed, or even hedged.

It is even more concerning that the Christmas holiday does not occur in isolation, but rather coincides with a time when a series of macro uncertainties are being concentrated and released. The "rate cut but hawkish" signal released by the Federal Reserve during Super Central Bank Week has significantly tightened market expectations for future liquidity; meanwhile, the Bank of Japan's upcoming rate hike decision on December 19 is shaking the long-standing funding structure of global yen carry trades. Under normal circumstances, these two types of macro shocks could be gradually digested by the market over a longer period, with prices being repriced through repeated negotiations. However, when they coincide with the Christmas holiday, a period of weakest liquidity, their impact is no longer linear but exhibits a clear amplification effect. The essence of this amplification effect is not the panic itself, but rather a change in market mechanisms. Insufficient liquidity means that the price discovery process is compressed, and the market cannot gradually absorb information through continuous trading; instead, it is forced to adjust through more drastic price jumps. For the crypto market, a decline in this environment often does not require new significant negative news; it only needs a concentrated release of existing uncertainties to trigger a chain reaction: price declines lead to passive liquidation of leveraged positions, which further increases selling pressure, and this selling pressure is rapidly amplified in a thin order book, ultimately resulting in severe volatility in a short period. Historical data shows that this pattern is not an isolated case. Whether in the early cycles of Bitcoin or in the more mature stages of recent years, the period from late December to early January has consistently been a time when the volatility of the crypto market significantly exceeds the annual average. Even in years with relatively stable macro environments, the decline in holiday liquidity often accompanies rapid price increases or decreases; and in years with high macro uncertainty, this time window is more likely to become an "accelerator" for trending markets. In other words, holidays do not determine direction, but they greatly amplify price performance once a direction is confirmed.

IV. Conclusion

In summary, the current pullback in the crypto market is more akin to a phase revaluation triggered by changes in global liquidity paths rather than a simple reversal of a trending market. The Federal Reserve's rate cut has not provided new valuation support for risk assets; on the contrary, its constraints on future easing space in forward guidance have led the market to gradually accept a new environment of "falling rates but insufficient liquidity." In this context, high-valuation and high-leverage assets naturally face pressure, and the adjustment in the crypto market has a clear macro logical basis.

At the same time, the Bank of Japan's rate hike constitutes the most structurally significant variable in this round of adjustment. The yen, long regarded as the core funding currency for global carry trades, will trigger not only localized capital flows but also a systemic contraction of global risk asset exposure once its low-cost assumption is broken. Historical experience indicates that such adjustments often have a phased and repetitive nature, and their impact will not be fully released in a single trading day but will gradually complete the deleveraging process through sustained volatility. Crypto assets, due to their high liquidity and high beta characteristics, often reflect pressure first in this process, but this does not necessarily mean that their long-term logic is negated.

For investors, the core challenge in this phase is not to judge direction but to identify changes in the environment. When policy uncertainty and liquidity contraction coexist, the importance of risk management will significantly outweigh trend judgment. Truly valuable market signals often appear after macro variables gradually materialize and arbitrage funds complete their phased adjustments. For the crypto market, the current situation resembles a transitional period for recalibrating risks and rebuilding expectations, rather than the final chapter of a trend. The mid-term direction of future prices will depend on the actual recovery of global liquidity after the holiday and whether the divergence in major central bank policies further deepens.

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