The real liquidity valve! The biggest suspense of the FOMC meeting: Will the Federal Reserve's balance sheet resume expansion?

The market is almost 100% betting that the Federal Reserve will implement its third rate cut of the year at the December 10 FOMC meeting, but this may not be the biggest focus of this week’s meeting. Analysts from global asset management giant PineBridge point out that what currently has a deeper impact on the US asset market is the “balance sheet policy.” The market is holding its breath for any hint from the Fed regarding the future of its massive $6.5 trillion balance sheet—whether it will remain unchanged or start expanding again to inject liquidity. Although Bitcoin prices have rebounded above $90,000 on rate cut expectations, historical data sends a stern warning: after the previous seven FOMC meetings this year, Bitcoin fell after six of them, with an average drop of 15%.

Dual Narrative: Rate Cut a Done Deal, Balance Sheet Policy Takes Center Stage

According to the CME FedWatch tool, the market sees a more than 90% probability that the Fed will announce another 25 basis point rate cut this Wednesday (December 10). This would be the third rate cut of the year, following those in September and October, bringing the policy rate range down to 3.5%–3.75%, edging closer to the historical neutral rate level. For crypto traders, this expectation has been fully priced in and has partly driven Bitcoin’s recent rebound from its lows to above $90,000.

However, Michael Kelly, Global Head of Multi-Asset at PineBridge Investments, offers a more critical perspective: the market is actually operating under “two monetary policies.” One is the public-facing interest rate policy, which, though still restrictive, seems to have lost its suppressive effect on asset prices like stocks. The other is the balance sheet policy, targeted at the “asset-rich” class. By directly purchasing assets (such as Treasuries, MBS), this policy injects base money into the financial system, creates a “wealth effect,” and continues to support consumption and the economy. The S&P 500 is up 16.8% year-to-date, just a step away from its all-time high, a vivid example of liquidity-driven performance.

Therefore, the real focus of this week’s meeting will be on the Fed’s future plans for its $6.5 trillion balance sheet. Since officially ending quantitative tightening on December 1, the market is eager to know: will the Fed keep the balance sheet “flat,” or is it preparing to “expand again” to meet the natural growth in economic liquidity needs? The answer to this question may be far more important for risk asset pricing logic than a rate cut that’s already been fully anticipated.

Liquidity at a Crossroads: A Potential Shift from “Draining” to “Injecting”

To understand why balance sheet policy is so critical, we need to look back at recent developments. The Fed has reduced its pandemic-swollen balance sheet from about $9 trillion by roughly $2.5 trillion. However, to avoid repeating the 2019 “repo crisis,” it halted this shrinkage on December 1 due to pressures in the overnight funding market, marking a significant policy pause.

Now, the market is speculating about the Fed’s next move. Bank of America’s global rates strategy team made a bold prediction in a client report: they expect the Fed to announce at this meeting that it will begin “reserve management purchases” of Treasuries at an initial pace of $45 billion per month starting in January, for a year or less. Team head Mark Cabana admits this forecast is “ahead of consensus.” Their analysis includes about $20 billion per month to meet the natural growth needs of the balance sheet, plus another $25 billion to “reverse excessive reserve depletion,” a process that could last at least six months.

Of course, there are more moderate views. Roger Hallam, Global Head of Rates at Vanguard Fixed Income Group, expects the Fed may start buying Treasuries at the end of Q1 or start of Q2, at a pace of $15–20 billion per month. He stresses this should be seen as “normal central bank reserve operations,” meant to ensure sufficient system liquidity to keep funding rates stable, not as a strong monetary policy signal. Regardless of the size, the direction is becoming clear: the Fed’s balance sheet operations are shifting from a “draining” to a potentially structural “injecting” phase.

2025 Bitcoin’s “Curse” Performance After FOMC Meetings

Key Data: After the 7 FOMC meetings held so far this year, Bitcoin dropped after 6 of them.

Average Decline: 15%

Recent Trend: After the rate cut announcements in September and October, Bitcoin fell by 17% and 19%, respectively.

Market Insight: Historical data strongly suggests “sell the news” risk, especially when rate cuts are fully priced in.

Bitcoin’s “FOMC Curse”: Will History Repeat Itself?

Even though macro liquidity prospects may be turning positive, the crypto market faces an unsettling historical pattern. Renowned analyst Ali Martinez recently pointed out that in the seven FOMC meetings held in 2025, Bitcoin prices fell sharply after six of them. The steepest drop occurred after the January meeting, with a 25% decline; after the two most recent meetings where rate cuts were actually announced (September and October), Bitcoin fell by 17% and 19%, respectively. On average, the post-meeting drop is as high as 15% for the year.

This “curse” may be tied to the classic market behavior of “buy the rumor, sell the news.” Before the meeting, traders build or hold long positions based on expectations of easier policy; once the decision is announced, regardless of whether the outcome meets expectations, some funds choose to take profits, especially once uncertainty is removed. Moreover, Fed Chair Powell’s remarks at the press conference often matter more than the decision itself. If he signals ongoing inflation concerns or a slower path of rate cuts—i.e., a “hawkish” tone—it can quickly reverse market optimism.

Currently, Bitcoin has rebounded above $90,000 ahead of the meeting, having partially priced in the rate cut. Martinez therefore warns market participants to remain cautious. After this week’s meeting, the market’s focus will quickly shift to Powell’s speech and the Fed’s “dot plot” forecast for 2026 monetary policy. Any hints at “higher for longer” rates or a slower easing pace could become the catalyst for a new round of crypto market sell-offs.

Deeper Impact on Crypto Markets: Liquidity “Rainfall” and a New Valuation “Anchor”

Beyond short-term price swings, a potential shift in the Fed’s balance sheet policy could have more far-reaching strategic effects on crypto markets. First, if the Fed launches a new round of reserve management purchases (even if technical rather than QE), it will inject base liquidity into the financial system. This liquidity acts like “rainfall,” eventually soaking into all risk asset sectors, including crypto. For Bitcoin, which has long thrived on the “global liquidity-driven” narrative, this is fundamentally bullish.

Second, this change could ease the “K-shaped economy” pressure plaguing markets this year. PineBridge’s Kelly points out that high rates have hurt small businesses and low-income households, while the asset-rich have benefited from rising stocks. If the Fed provides more abundant liquidity through balance sheet operations, it could help narrow credit spreads and improve overall financial conditions, creating a friendlier environment for broader economic activity—including investments in emerging asset classes like crypto.

However, there’s a paradox: long-term Treasury yields (such as the 10-year, now above 4.14%) have continued to rise recently. This suggests the market is simultaneously trading on “economic resilience” and “fiscal concerns,” keeping long-term borrowing costs high. This complex scenario—short-term rates falling while long-term rates rise—makes crypto asset valuation models more complicated. Investors must find a new balance between the “bullish” of abundant liquidity and the “bearish” of still-high real rates.

While everyone is focused on that 25-basis-point rate cut, the real game has already shifted to the Fed’s more hidden “liquidity valve” in its balance sheet. Whether it’s a potential monthly purchase plan of $15 billion or $45 billion, the symbolism is clear: after stopping the draining, the central bank’s faucet may soon be turned slightly open again. For Bitcoin, this both strengthens its long-term value narrative (“digital gold” versus liquidity flooding) and brings a risk of short-term technical pullback once the “good news” is fully priced in. Historical data serves as a warning bell, reminding investors to respect post-meeting price volatility, especially when macro narratives are optimistic. In the end, what determines market direction may not be what the Fed does, but what it plans to do next—and how the market interprets the vast gap between those intentions and the complex economic reality.