Crypto market macro research report: Liquidity repricing due to the Federal Reserve’s interest rate cut, the Bank of Japan’s interest rate increase and the Christmas holiday

# Written by: Huobi Growth Academy

## I. Fed Rate Cut: The Easing Path After the Rate Reduction

On December 11, the Federal Reserve announced a 25-basis-point rate cut as scheduled. On the surface, this decision was highly consistent with market expectations and was even interpreted as a signal that monetary policy was shifting toward easing. However, the market reaction quickly turned cold, with U.S. stocks and crypto assets falling in tandem and risk appetite contracting markedly. This seemingly counterintuitive trend actually reveals a key fact in the current macro environment: a rate cut itself does not equate to liquidity easing. During this super central bank week, the message delivered by the Fed was not about "turning on the liquidity taps again" but rather a clear constraint on future policy space.

From a policy perspective, changes in the dot plot dealt a substantial blow to market expectations. The latest projections indicate that the Fed may only implement one rate cut in 2026, significantly lower than the widely priced-in path of 2–3 cuts. More importantly, among the 12 voting members at this meeting, 3 explicitly opposed the rate cut, with 2 advocating for keeping rates unchanged. This divergence is not marginal noise; it clearly shows that the Fed’s internal vigilance against inflation risks is far higher than the market previously understood. In other words, the current rate cut is not the start of an easing cycle but rather a technical adjustment in a high-interest-rate environment to prevent excessive tightening of financial conditions.

For this reason, what the market truly expects is not a "one-off rate cut" but a clear, sustainable, and forward-looking easing path. The pricing logic of risk assets depends not on the absolute level of current interest rates but on the discounting of future liquidity conditions. When investors realized that this rate cut did not open up new easing space but instead might lock in future policy flexibility in advance, the original optimistic expectations were quickly revised. The signal released by the Fed is akin to a "painkiller"—it temporarily eases tensions but does not address the root cause. Meanwhile, the restrained stance revealed in the policy guidance has forced the market to reassess future risk premiums. Against this backdrop, the rate cut has instead become a classic case of "buy the rumor, sell the fact."

Long positions built around easing expectations have started to unwind, with high-valuation assets bearing the brunt. Growth and high-beta sectors in U.S. stocks came under pressure first, and the crypto market was not spared. The pullback in Bitcoin and other mainstream crypto assets is not driven by a single negative factor but is a passive response to the reality that "liquidity will not return quickly." As futures basis converges, ETF marginal buying weakens, and overall risk appetite declines, prices naturally gravitate toward a more conservative equilibrium level.

Deeper changes are reflected in the shift in the U.S. economic risk structure. A growing number of studies point out that the core risk facing the U.S. economy in 2026 may no longer be a traditional cyclical recession but a demand-side contraction directly triggered by a sharp correction in asset prices. After the pandemic, the U.S. saw an "excess retirement" cohort of approximately 2.5 million people. The wealth of this group is highly dependent on the performance of the stock market and risk assets, creating a strong correlation between their consumption behavior and asset prices. A sustained decline in stock prices or other risk assets will synchronously shrink their consumption capacity, thereby creating a negative feedback loop for the overall economy.

In this economic structure, the Fed’s policy options are further constrained. On one hand, stubborn inflationary pressures persist; premature or excessive easing could reignite price increases. On the other hand, if financial conditions continue to tighten and asset prices experience a systemic correction, the wealth effect could quickly transmit to the real economy, triggering a demand downturn. The Fed is thus caught in an extremely complex dilemma: continuing to aggressively suppress inflation may trigger an asset price collapse, while tolerating higher inflation levels helps maintain financial stability and asset prices.

A growing number of market participants are coming to accept the view that in future policy games, the Fed is more likely to prioritize "protecting the market" over "protecting inflation targets" at critical junctures. This means that the long-term inflation anchor may shift upward, but short-term liquidity injections will be more cautious and intermittent rather than forming a sustained wave of easing. For risk assets, this is an unfavorable environment—interest rates are falling too slowly to support valuations, while liquidity uncertainty persists.

It is against this macro backdrop that the impact of this super central bank week extends far beyond the 25-basis-point rate cut itself. It marks a further revision of market expectations for the "era of unlimited liquidity" and lays the groundwork for the subsequent Bank of Japan rate hike and year-end liquidity contraction. For the crypto market, this is not the end of the trend but a critical phase where risks must be recalibrated and macro constraints must be re-understood.

## II. Bank of Japan Rate Hike: The Real "Liquidity Bomb Disposer"

If the Fed’s role during the super central bank week was to disappoint and force a revision of market expectations for "future liquidity," then the action the Bank of Japan is set to take on December 19 is more akin to a "bomb disposal operation" acting directly on the underlying structure of the global financial system. Market expectations for a 25-basis-point rate hike by the Bank of Japan, lifting the policy rate from 0.50% to 0.75%, have reached nearly 90%. While this seems like a moderate rate adjustment, it will push Japan’s policy rate to its highest level in three decades.

The key issue is not the absolute level of the interest rate itself but the chain reaction this change will trigger in the global capital flow logic. 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, the impact will extend far beyond Japan’s domestic market.

Over the past decade-plus, a structural consensus has gradually taken hold in global capital markets: the yen is a "permanent low-cost currency." Supported by long-term ultra-loose policies, institutional investors can borrow yen at near-zero or even negative interest rates, convert it into U.S. dollars or other high-yield currencies, and allocate it to U.S. stocks, crypto assets, emerging market bonds, and various risk assets. This model is not a short-term arbitrage strategy but has evolved into a long-term capital structure worth trillions of dollars, deeply embedded in the global asset pricing system.

Because it has persisted for so long and been so stable, yen carry trades have gradually transformed from a "tactic" into a "background assumption," rarely priced by the market as a core risk variable. However, once the Bank of Japan clearly enters a rate-hiking cycle, this assumption will be forced to be re-evaluated. The impact of rate hikes extends beyond a marginal increase in financing costs; more importantly, it will alter market expectations for the long-term direction of the yen exchange rate. As policy rates rise and inflation and wage structures change, the yen will no longer be just a passively depreciating funding currency but may transform into an asset with appreciation potential.

Against this expectation, the logic of carry trades will be fundamentally undermined. Capital flows that were previously centered on "interest rate spreads" will now incorporate "exchange rate risk" considerations, rapidly eroding the risk-reward ratio of such trades.

In this scenario, the choice facing carry trade funds is straightforward yet highly disruptive: either close positions early to reduce yen liability exposure 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 option. The method of closing positions is equally direct—selling risk assets to buy back yen to repay financing. This process does not distinguish between asset quality, fundamentals, or long-term prospects; its sole goal is to reduce overall exposure, thus exhibiting a clear characteristic of "indiscriminate selling." U.S. stocks, crypto assets, and emerging market assets often come under pressure simultaneously, leading to highly correlated declines.

History has repeatedly validated this mechanism. In August 2025, the Bank of Japan unexpectedly raised its policy rate to 0.25%. While this magnitude was not radical in traditional terms, it triggered violent reactions in global markets. Bitcoin fell 18% in a single day, various risk assets came under pressure, and it took the market nearly three weeks to gradually recover. The reason for the severity of that shock was that the rate hike was sudden, forcing carry trade funds to deleverage rapidly without preparation.

The upcoming December 19 meeting, however, is different from that "black swan event"—it is more like a "gray rhino" that has revealed its tracks in advance. The market has priced in the rate hike to some extent, but expectations alone do not mean risks have been fully digested, especially when the rate hike is larger and accompanied by other macro uncertainties.

What is more noteworthy is that the macro environment in which the Bank of Japan is raising rates is more complex than in the past. Major global central banks are diverging in their policies: the Fed has cut rates in name but tightened expectations for future easing space; 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 clearly tightening 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 a phased, recurring process.

For the crypto market, which is highly dependent on global liquidity, the persistence of this uncertainty means that the center of price volatility may remain elevated for some time. Therefore, the Bank of Japan’s rate hike on December 19 is not just a regional monetary policy adjustment but a key juncture that could trigger a rebalancing of global capital structures. What it "disposes of" 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, due to their high liquidity and high-beta nature, are often the first to absorb the impact. This shock does not necessarily mean a reversal of the long-term trend, but it will almost certainly amplify short-term volatility, suppress risk appetite, and force the market to re-examine the capital logic that has been taken for granted for years.

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

Starting December 23, major North American institutional investors will gradually enter Christmas holiday mode, and global financial markets will thus enter the most typical and easily underestimated period of liquidity contraction each year. Unlike macro data or central bank resolutions, holidays do not change any fundamental variables but significantly weaken the market’s "shock absorption capacity" in a short period. For markets like crypto assets that are highly dependent on continuous trading and market-making depth, this structural decline in liquidity is often more disruptive than a single negative event.

In normal trading environments, the market has sufficient counterparties and risk-bearing 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.

What is more alarming is that the Christmas holiday does not occur in isolation but coincides with a time window when a series of current macro uncertainties are converging. The Fed’s "hawkish rate cut" signal during the super central bank week has significantly tightened market expectations for future liquidity; at the same time, the upcoming Bank of Japan rate hike on December 19 is shaking the long-standing capital structure of global yen carry trades. Under normal circumstances, these two types of macro shocks could be gradually digested by the market over an extended period, with prices completing repricing through repeated games. However, when they coincide with the Christmas holiday—the window of weakest liquidity—their impact is no longer linear but shows a clear amplification effect.

The essence of this amplification effect is not panic itself but changes in market mechanisms. Insufficient liquidity means that the price discovery process is compressed; instead of gradually absorbing information through continuous trading, the market is forced to complete adjustments through more violent price jumps. For the crypto market, declines in this environment often do not require new major negative news; a concentrated release of existing uncertainties is sufficient to trigger a chain reaction: price declines trigger forced liquidation of leveraged positions, which in turn increases selling pressure, and this selling pressure is quickly amplified in thin order books, ultimately leading to sharp short-term volatility.

Historical data shows that this pattern is not an anomaly. Whether in Bitcoin’s early cycles or its more mature stage in recent years, the period from late December to early January has consistently seen crypto market volatility significantly higher than the annual average. Even in years with relatively stable macro environments, declining holiday liquidity is often accompanied by rapid price surges or plunges; in years with high macro uncertainty, this time window is more likely to become an "accelerator" for trend-based market movements. In other words, holidays do not determine the direction of the market but will greatly amplify price performance once the direction is confirmed.

## IV. Conclusion

Overall, the current correction experienced by the crypto market is more akin to a phased repricing triggered by changes in the global liquidity path, rather than a simple reversal of the trend. The Fed’s rate cut has not provided new valuation support for risk assets; on the contrary, its restriction on future easing space in forward guidance has gradually led the market to accept a new environment of "declining interest rates but insufficient liquidity." Against this backdrop, high-valuation and highly leveraged assets naturally face pressure, and the adjustment in the crypto market has a clear macro logic basis.

At the same time, the Bank of Japan’s rate hike constitutes the most structurally significant variable in this round of adjustments. As the core funding currency for global carry trades for a long time, the breaking of the yen’s low-cost assumption will trigger not just local capital flows but a systemic contraction of global risk asset exposure. Historical experience shows that such adjustments are often phased and recurring; their impact will not be fully released in a single trading day but will complete the deleveraging process through sustained volatility. Due to their high liquidity and high-beta nature, crypto assets often reflect pressure first in this process, but this does not necessarily mean their long-term logic has been negated.

For investors, the core challenge in this phase is not judging the direction of the market but identifying 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 emerge after macro variables are gradually resolved and carry trade funds complete phased adjustments. For the crypto market, the current period is more of a transition phase for recalibrating risks and rebuilding expectations, rather than the end of the market cycle. The medium-term direction of future prices will depend on the actual recovery of global liquidity after the holiday season and whether the policy divergence among major central banks deepens further.

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