Markets broadly expect the Federal Reserve to deliver another rate cut this week, but the real driver for risk assets lies in the trajectory of the Fed’s balance sheet. QT quietly halted on December 1, and investors are now watching closely to see whether the Fed will initiate a new liquidity-injection cycle. Several institutions project that as early as January, the Fed may begin purchasing roughly $45 billion per month in T-bills to stabilize reserves and avoid a repeat of the repo market stress seen in 2019.
In the current K-shaped U.S. economy and high-rate environment, balance sheet policy matters more than interest rates themselves. Higher-income consumers continue to support demand while lower-income households struggle; meanwhile, equity markets—buoyed by liquidity—are already up over 16% this year. If the Fed resumes balance sheet expansion, it would reinforce the wealth effect and extend strength across risk assets.
At the same time, the Bank of Japan may raise rates this month, tightening global interest-rate differentials. Higher yen funding costs could prompt carry-trade unwinds and capital flowing back to Japan, pressuring U.S. equities, Treasuries, and crypto. Should the combination of “Fed rate cuts + BOJ rate hikes” materialize, markets could see sharp volatility and near-term corrections in high-yielding assets.
Bitunix Analyst View:
With rate expectations already fully priced in, the fate of the Fed’s $6.5 trillion balance sheet will be the true determinant for risk assets. Diverging global monetary policies increase uncertainty for liquidity-sensitive markets. The Fed’s communication this week will set the tone: a clear signal of balance-sheet expansion could reignite risk appetite, while a wait-and-see stance may leave volatility driven by adjustments in global carry trades.
