The Federal Reserve has once again opened the liquidity tap, but this time the water is not for everyone.
At 10 PM Beijing time on December 22, the Federal Reserve injected about $6.8 billion into the financial market through a repurchase agreement. This is already the third time the Federal Reserve has acted in the past 10 days, with a total injection of $38 billion.
These operations have been officially labeled as 'year-end liquidity management,' but keen market players have already sensed something unusual. As a cryptocurrency analyst who has experienced multiple market cycles, I believe this is far from a simple seasonal operation, but rather a prelude to an impending liquidity shift.
1. The Federal Reserve's 'low-key injection': Not just a year-end fattening.
On the surface, the Federal Reserve claims that these repurchase operations are merely to address the peak demand for year-end funding and ensure the smooth operation of the banking system. However, upon closer inspection, there are three key details worth pondering:
Firstly, the scale of this liquidity injection exceeds the norm. Just after ending quantitative tightening (QT) on December 1, the Federal Reserve injected $13.5 billion into the banking system through overnight repurchase operations in one go. This scale even surpassed the peak during the internet bubble, marking the second largest liquidity injection since the COVID-19 pandemic.
Secondly, the Federal Reserve's balance sheet operations present a peculiar phenomenon of 'mutual combat': on one hand, injecting liquidity into the market through repurchase operations and 'Reserve Management Purchases (RMP)', while still executing quantitative tightening (QT) plans on the other. This operation is akin to 'letting air out of a balloon while occasionally pumping a bit in', fearing that letting air out too quickly will cause the balloon to explode.
Most critically, the internal divisions within the Federal Reserve regarding current policies have reached unprecedented levels. At the December interest rate meeting, among the 19 voting officials, 3 supported an interest rate hike, while 7 advocated for maintaining interest rates unchanged in 2026. This division has left the market at a loss, exposing the Federal Reserve's true dilemma in the face of economic uncertainty.
2. Liquidity 'bias': Financial markets are celebrating while the real economy is left staring blankly.
Where is the water released by the Federal Reserve actually flowing? The answer is: most of it is circulating within the financial markets.
Despite the Federal Reserve's third rate cut, cumulatively lowering rates by 75 basis points, the real economy has not felt a significant improvement in liquidity. The latest data shows that the loan approval rate for small businesses in the U.S. is only 48%, down 3 percentage points month-on-month, reaching the lowest level since March 2024.
Worryingly, in November, the U.S. private sector laid off 32,000 people, setting a record for the highest monthly figure this year. Disposable income for residents fell by 0.3% month-on-month, marking the third decline this year. Consumption, the main engine of the U.S. economy, has begun to slow down.
In stark contrast, financial markets are in a frenzy. The S&P 500 index rose 1.2% after the interest rate decision was announced, while the Nasdaq index increased by 1.5%. Gold prices have stabilized above $4,400 per ounce, with a cumulative increase of nearly 68% this year.
This differentiation reveals a harsh reality: the Federal Reserve's liquidity 'medicine' is first consumed by Wall Street, while Main Street (the general public) can only lick the spoon.
3. Opportunities for Bitcoin: A 'surfboard' in the wave of liquidity.
What does the Federal Reserve's liquidity operation mean for the cryptocurrency market? I believe it is a force that cannot be ignored.
Historical experience shows that liquidity expansion cycles are generally beneficial for risk assets. Fundstrat analyst Tom Lee pointed out that after the last time the Federal Reserve ended quantitative tightening, the market rebounded strongly within weeks. Based on this pattern, he predicts that Bitcoin may strengthen in early 2026 and could potentially reach a historical high at the end of January.
The current cryptocurrency market is in a state of 'extreme fear', with the Fear and Greed Index at only 25. However, historically, periods of extremely low market sentiment often provide good long-term investment opportunities.
Technically, Bitcoin is testing the mid-term resistance level of $89,000. If it successfully breaks through, the next target may be in the range of $91,000 to $93,500.
However, traders need to closely monitor a potential risk point: possible interest rate hikes by the Bank of Japan. After every previous interest rate hike by the Bank of Japan, the cryptocurrency market has experienced significant sell-offs. If the Bank of Japan raises interest rates again in December, it may temporarily delay the beneficial effects of the Federal Reserve's liquidity shift.
4. Outlook: A liquidity feast or a mirage in 2026?
Looking ahead to 2026, how will the Federal Reserve's liquidity operations evolve? I believe there may be two scenarios:
Baseline scenario: The Federal Reserve will begin to reduce the scale of bond purchases in the second quarter of 2026, relaxing the Supplementary Leverage Ratio (SLR) to derive approximately $100 billion in liquidity. In this case, liquidity replenishment will be roughly similar to the market gap, and risk assets will benefit more from sentiment rather than having substantial room for valuation increases.
Aggressive scenario: The Federal Reserve maintains a monthly bond purchase scale of $40 billion in the first half of the year, deriving $200 billion in liquidity from the relaxed SLR. In this case, liquidity will far exceed the market gap, leading to excess supply, and U.S. stocks and cryptocurrencies may receive additional valuation support.
I personally lean towards a middle ground: the Federal Reserve will maintain relatively loose liquidity injections in the first half of the year to counter economic downturn pressures. However, as inflation may rebound again, policy may shift back to tightening in the second half.
For investors, two signals need to be closely monitored in the first quarter of next year: first, when the Federal Reserve adjusts the pace of balance sheet expansion; second, whether the bank reserve ratio rises again. These two indicators will become important barometers for assessing the true state of liquidity.
When the Federal Reserve is playing the balancing act of 'injecting water with the left hand while draining it with the right', smart investors should focus on the direction of the flow rather than the magician's gestures. In the coming weeks, as the year-end liquidity shortage gradually eases, the cryptocurrency market may welcome a round of recovery.
"Be greedy when others are fearful"; the current market fear index is at a low level, providing long-term investors with a good opportunity to gradually position themselves. When do you think this liquidity feast from the Federal Reserve will last? Feel free to share your insights in the comments!
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