After the market digests the interest rate cut expectations, how should we navigate the direction of risk assets?

Original Article Title: "This Thursday Morning, the Direction of Risk Assets Was Not Determined by the Rate Cut Itself"

Original Article Author: David, DeepTech TechFlow

This Thursday (东八区), the Federal Reserve will announce its last interest rate decision of the year. The market expectations are very consistent:

According to CME FedWatch data, the probability of a 25 basis point rate cut is over 85%.

If implemented, this will be the third consecutive rate cut since September, bringing the federal funds rate to the 3.5%-3.75% range.

For cryptocurrency investors accustomed to the "Rate Cut = Good News" narrative, this sounds like good news.

However, the problem is that when everyone expects a rate cut, the rate cut itself is no longer the driving factor of the market.

The financial market is an expectation machine. Prices reflect not "what has happened" but "what has happened relative to expectations".

An 85% probability means that a rate cut has already been fully priced in; when announced early Thursday morning, unless there is an unexpected development, the market will not react much.

So what is the real variable?

The Federal Reserve's Outlook for Next Year. A 25 basis point cut is mostly a certainty, but how long the rate-cutting cycle will last, how many more cuts in 2025, these are the things the market is truly playing for.

Early Thursday morning, the Federal Reserve will simultaneously update their forecast for the future rate path, and this forecast often has more impact on the market direction than the rate cut decision itself.

But this time, there is an additional issue, which is that the Federal Reserve itself may not have a clear view.

The reason is that from October 1 to November 12, the U.S. federal government was shut down for 43 days. During this period, the statistical department was on hold, leading to the cancellation of the October CPI release, and the November CPI being postponed to December 18, a full week later than this week's FOMC meeting.

This means that Fed members are lacking inflation data from the past two months when discussing the rate outlook.

When decision-makers themselves are groping in the dark, the guidance they provide will be more ambiguous, and ambiguity often means a wider range of market volatility.

Let's first take a look at this week's timeline:

We can specifically analyze what kind of signals the Fed may give and how the market would react to each.

Game Expectations for Next Year

After each FOMC meeting, the Fed releases an "Summary of Economic Projections."

There is a chart inside that shows all Fed committee members' expectations for future interest rates.

Each member plots a point to indicate where they think the year-end rate should be. Because it looks like a bunch of scattered dots, the market commonly calls it a "dot plot." You can find the original dot plot for each meeting on the Federal Reserve website.

The following is the dot plot released at the September 17 FOMC meeting.

It shows the internal divisions and consensus within the Fed. If the dots are clustered together, it indicates that committee members are in agreement, and the policy path is relatively clear;

If the dots are widely dispersed, it indicates internal disagreement, and the future is full of variables.

For the crypto market, uncertainty itself is a risk factor. It will suppress risk appetite, causing funds to lean towards a wait-and-see approach rather than entering the market.

From the chart, you can see that the dots in the 2025 column are mainly concentrated in two areas: around 3.5%-3.625%, there are about 8-9 dots, and around 3.75%-4.0%, there are also 7-8 dots. This indicates that the committee is divided into two camps:

One camp believes there should be 1-2 more cuts this year, while the other camp believes there should be a pause or only one more cut. The median is around 3.6%, meaning the majority's baseline expectation is to cut rates twice in 2025 (including this week's).

Looking at 2026, the divisions among Fed members are even greater.

The current rate is 3.75%-4.00%. If it drops to around 3.4% by the end of next year, it means there would be only 1-2 cuts throughout the year. But from the chart, some members believe it should drop to 2.5% (equivalent to 4-5 cuts), while others believe it should stay at 4.0% (no cuts at all).

Within the same committee, the most hawkish and most dovish expectations are 6 rate cuts apart. This is a "highly divided" Federal Reserve committee.

This division in itself is a signal.

If the Federal Reserve cannot reach a consensus internally, the market will naturally vote with its feet. Currently, traders' bets are more aggressive than the official guidance. CME FedWatch shows that the market is pricing in 2-3 rate cuts by 2026, while the median of the official dot plot only shows 1 cut.

Therefore, this Thursday's FOMC meeting is to some extent a "showdown" between the Fed and the market, whether the Fed will align with the market or stick to its own pace.

Three Scenarios, Three Reactions

Based on the current information, there are roughly three possible outcomes for this week's FOMC meeting.

1. The most likely scenario is "as expected": a 25bp rate cut, the dot plot maintaining the guidance from the September meeting, Powell repeatedly emphasizing "data dependency" in the press conference, without giving a clear direction.

In this scenario, the market will not experience significant fluctuations. Since the rate cut is already priced in and the guidance remains unchanged, there is a lack of new trading signals. The crypto market will likely follow a minor oscillation in the stock market before returning to its previous trend.

This is also the benchmark expectation of most Wall Street institutions, including recent research reports from Goldman Sachs and Raymond James pointing in this direction.

2. The next possible scenario is "dovish-leaning": a 25bp rate cut, but the dot plot indicates the possibility of 2 or more cuts by 2026, with Powell's language leaning towards dovishness, emphasizing that the labor market risk is greater than the inflation risk.

This is equivalent to the Fed aligning with market expectations, confirming a loose path. A weaker dollar will boost dollar-denominated assets, while improving liquidity expectations will uplift market sentiment. BTC and ETH may follow the stock market's rebound, with the former likely testing recent highs.

3. A less probable but not dismissible scenario is "hawkish-leaning": despite a 25bp rate cut, Powell emphasizes inflation stickiness, hinting at limited rate-cutting space next year; or there are multiple dissenting votes, showing internal resistance to further easing.

This is like telling the market "you've expected too much," leading to a stronger dollar, tightening liquidity expectations, and pressure on risk assets. The crypto market may face a short-term correction, especially high-beta altcoins.

However, if it is just a matter of hawkish wording rather than a substantive policy shift, the decline is often limited, and it may even become a buying opportunity.

Normally, the Fed would adjust the dot plot based on the latest data. But this time, they missed two months of CPI due to the government shutdown and could only rely on incomplete information to make a judgment.

This has several chain reactions. First, the reference value of the dot plot itself is discounted; the members themselves are unsure, so the plotted points may be more scattered.

Second, the weight of Powell's press conference will be higher, and the market will look for directional cues in every word he says. If the tendency shown in the dot plot is inconsistent with Powell's tone, the market will be more confused, and volatility may increase.

For crypto investors, this means that the market conditions early Thursday morning may be more unpredictable than usual.

Instead of betting on a direction, it's better to focus on the volatility itself. When uncertainty rises, controlling position size is more important than betting on price movements.

The Job Openings Data Tonight Isn't as Important as You Think

We've discussed Thursday's FOMC so far, but tonight (Tuesday 23:00 东八区) there is another data release: JOLTs.

Occasionally, some people on social media may make it sound very important, like "quietly determining liquidity trends" and so on. But truth be told, JOLTs don't carry much weight in macroeconomic data. If you're short on time, focusing on Thursday's FOMC is enough;

If you want to learn more about the labor market background, you can continue reading.

JOLTs stands for Job Openings and Labor Turnover Survey, conducted monthly by the U.S. Bureau of Labor Statistics (BLS). It surveys how many job positions are open in U.S. businesses, how many people are being hired, and how many people are leaving their jobs.

The most closely watched metric is "job openings": the higher the number, the stronger the demand for hiring in businesses, and the tighter the labor market.

During the peak of 2022, this number exceeded 12 million, indicating a frenzy of hiring, rapid wage increases, and Fed concerns about inflationary pressures. Now, this number has fallen back to around 7.2 million, basically returning to pre-pandemic normal levels.

Image Source: Golden Finance Data

Why might the importance of this data be overestimated?

First, JOLTs is a lagging indicator. The data released today is for October, but it is now December. The market pays more attention to more timely data, such as weekly initial jobless claims and the monthly nonfarm payroll report released at the beginning of each month.

Second, the expected job openings of around 7.1 million are not considered "overheated." Some analysts have pointed out that the ratio of job openings to the unemployed fell below 1.0 in August, meaning there is now less than one job opening for every unemployed person.

This is completely different from the situation in 2022 where "one unemployed person corresponds to two job openings." The narrative of a "hot" labor market is actually outdated.

According to forecasts from LinkUp and Wells Fargo, the October JOLTS data to be released tonight is likely to be around 7.13-7.14 million, with little change from the previous 7.2 million.

If the data meets expectations, the market will have little reaction; it will simply confirm the existing narrative of the "labor market continuing to slowly cool down" and will not change anyone's expectations of the Fed.

Tonight's data is more like an "appetizer" before the FOMC meeting, and the real main course will be served in the early hours of Thursday.

How Will My BTC Behave?

The previous chapters have discussed macro data, but you may be more concerned about one question: How will all this affect my BTC and ETH holdings?

In summary, it will have an impact, but it's not as simple as "rate cut = rise."

The Fed's interest rate decisions affect the cryptocurrency market through several channels.

The first is the U.S. Dollar. Rate cuts mean a decrease in the returns of dollar-denominated assets, and funds will look for other options. When the dollar weakens, dollar-denominated assets (including BTC) often perform better.

The second is liquidity. In a low-rate environment, the cost of borrowing is low, there is more money in the market, and some of it flows into risk assets. The bull market of 2020-2021 was to a large extent the result of the Fed's unlimited quantitative easing.

The third is risk appetite. When the Fed sends a dovish signal, investors are more willing to take on risk, and funds flow from bonds and money market funds to stocks and cryptocurrencies; conversely, a hawkish signal will cause funds to flow back into safe assets.

These three channels together form the transmission chain of "Fed Policy → Dollar/Liquidity → Risk Appetite → Crypto Assets".

In theory, BTC now has two popular identities: "digital gold" or "risk asset".

If it is digital gold, it should behave like gold, rising in market panic and being negatively correlated with the stock market. If it is a risk asset, it should rise and fall with the Nasdaq, performing well in loose liquidity.

In reality, in the past few years, BTC has been more like the latter.

According to CME's research, starting from 2020, BTC's correlation with the Nasdaq 100 has jumped from close to zero to around 0.4, sometimes even exceeding 0.7. The Kobeissi Letter recently pointed out that BTC's 30-day correlation once reached 0.8, the highest level since 2022.

But recently, an interesting phenomenon has emerged. According to CoinDesk's report, over the past 20 days, the correlation between BTC and the Nasdaq has dropped to -0.43, showing a clear negative correlation.

Data Source: https://newhedge.io/

The Nasdaq is only 2% away from its all-time high, while BTC has dropped 27% from its October peak.

Market maker Wintermute has an explanation for this: BTC is currently exhibiting "negative skewness," falling more when the stock market falls and responding sluggishly when the stock market rises. In their words, BTC "exhibits high Beta in the wrong direction only."

What does this mean?

If the FOMC releases a dovish signal this week and the U.S. stock market rises, BTC may not necessarily rebound in sync; but if a hawkish signal is released and the U.S. stock market falls, BTC may drop even further. This is an asymmetric risk structure.

Summary

After all that discussion, here is a framework for ongoing tracking.

What to Watch This Week (Dec 9-12)

The key focus will be the FOMC meeting early Thursday. Specifically, look out for three things: any changes in the dot plot, especially the median rate expectation for 2026, Powell's press conference tone leaning dovish or hawkish, and whether there are multiple dissenting votes.

What to Watch in Mid to Late December

On Dec 18, November's CPI will be released. If inflation data bounces back, the market may reprice expectations of rate cuts next year, challenging the Fed's "continued accommodation" narrative.

What to Watch in Q1 2026

Firstly, keep an eye on changes in the Fed chairmanship. Powell's term ends in May 2026.

Secondly, monitor the ongoing impact of Trump's policies. Further escalation of tariff policies could continue to raise inflation expectations, squeezing the Fed's room for maneuver.

Additionally, stay alert for any signs of accelerated deterioration in the labor market. If layoff figures begin to rise, the Fed may be forced to cut rates faster, setting the stage for a different scenario.

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