At 16:30 Eastern Time today, the Federal Reserve will release its first balance sheet projection for 2026. This was originally just a routine data release, but the market has fabricated a set of "prediction rules" on its own:

If the balance sheet exceeds $6.6 trillion, cut interest rates by 50 basis points; if it’s between $6.5 trillion and $6.6 trillion, cut by 25 basis points; below $6.5 trillion, no rate cut in January.

Sounds logical? But this correlation actually lacks genuine policy support; essentially, it’s just market emotional gambling.

Why say that? Because the size of the balance sheet and interest rate decisions are not simply causally linked. Balance sheet reduction manages liquidity supply, while rate cuts adjust the price tool. Although related, there’s no mechanical conversion formula between them.

The truly important indicators to watch are: will the unemployment rate break through 5%, can core PCE remain steadily below 3%, and how the FOMC dot plot in January reshapes the rate cut expectations for the year.

What are the more realistic risks? If the market experiences extreme volatility due to misinterpretation of a single data point, it could trigger a chain of liquidations in derivatives (cryptocurrency leverage contracts are concentrated in the $69,000-$71,000 range). At that point, both safe-haven assets and risk assets might decline simultaneously.

What should you do? Don’t oversimplify complex monetary policy into a math contest. Pay more attention to volatility index (VIX) and US dollar index (DXY) signals, maintain some cash positions during policy windows, rather than blindly going all-in on one direction.

The market loves to create "illusion of certainty" amid uncertainty. The real risk often appears when everyone believes in that illusion. Staying alert and resilient, and having the ability to cope with prediction errors, is more valuable than the prediction itself.