The Truth Behind the Fed's Halt on Balance Sheet Reduction: Technical Adjustment or Prelude to a Liquidity Surge?

Fact-check: The policy is true, but "complete suspension" is an exaggerated interpretation.

On October 30, 2025, the Fed officially announced the end of the reduction in the holdings of government bonds starting from December 1. This policy adjustment is true, but it is not what users refer to as "the balance sheet reduction is fully paused from now on". The real situation is:

• Treasury portion: Stop rolling over up to $50 billion of maturing debt each month and stabilize the holding amount by extending the maturity of maturing treasuries.

• MBS section: Continue to allow up to $35 billion of mortgage-backed securities to mature each month, but reinvest the entire principal into U.S. Treasuries.

• Balance sheet size: currently about $6.6 trillion, reduced by $2.4 trillion from the peak of the pandemic, but still 65% higher than before the pandemic (about $4 trillion)

This means that the Fed's balance sheet reduction pace has significantly slowed down, but has not completely stopped shrinking. It is reasonable for the market to interpret this as a "dovish turn," but portraying it as an "emergency stop of the pumping" is overly dramatic—this is essentially a technical adjustment, rather than a 180-degree reversal of policy stance.



Why hit the brakes at this moment? Threefold reality pressure.

1. Currency Market Liquidity Warning Line

New York Fed executive Perli clearly pointed out that the level of bank reserves has fallen to the lower limit of the 'adequate' range. Data shows that the U.S. banking system reserves have decreased from $4.2 trillion in 2022 to about $3.1 trillion, and if QT continues, it may repeat the crisis of 2019 when repo market rates soared to 10%.

2. The "technical hijacking" of the debt ceiling

The issue of the US debt ceiling will resurface in early 2026. If the Fed continues to sell government bonds, the Treasury will be forced to issue bonds at higher interest rates, exacerbating fiscal pressure. Therefore, pausing QT is a stopgap measure to accommodate the Treasury's smooth financing needs, rather than simply stimulating the economy.

3. The Policy Dilemma of Inflation and Employment

The current core PCE inflation remains high at 3%, but the unemployment rate has risen from 3.4% to 4.1%. The Fed is walking a tightrope between "preserving jobs" and "containing inflation." Stopping QT is a signal to the market that "we will not let liquidity dry up," but there is still an 87.4% probability of a 25 basis point rate cut at the December meeting, indicating that the policy focus remains on steady growth.

Impact on the crypto market: Limited benefits, increased volatility

Short term (1-2 weeks): Psychological boost > Actual Liquidity

• Emotion-driven rebound: BTC rebounded from $89,000 to $91,200 after the news was released, but the trading volume only increased by 15%, indicating a weak rebound.

• Liquidity transmission lag: The liquidity released by the Fed after stopping QT remains at the reserve level of the banking system and does not immediately flow into risk assets. After the Fed restarted balance sheet expansion in September 2019, Bitcoin started to rise with a lag of 3 months.

• Core contradiction unresolved: The pressure to close yen arbitrage trades remains, with the 10-year Japanese bond yield at 1.80% suppressing global leveraged funds.

Medium term (1-3 months): Pay attention to the details of "reinvestment"

The Fed's reinvestment of MBS maturing funds into government bonds means:

• Treasury yields are suppressed, indirectly benefiting the relative value of gold, Bitcoin, and other "non-yielding assets".

• However, the worsening liquidity in the MBS market may affect the institutional collateral management in the crypto market (such as tokenized funds BUIDL).

• Key indicators: Observe whether the Fed's reverse repurchase scale falls below 500 billion, as this is a signal of substantial improvement in liquidity.

Long-term (over 6 months): The starting point of policy shift

If the Fed shifts to technical quantitative easing (300-500 billion USD per year) after the debt ceiling crisis in 2026, Bitcoin will benefit from a long-term negative correlation with the US dollar index. However, the premise is:

• US inflation confirmed to have fallen below 2.5%

• The institution has completed the deleveraging cycle

• Crypto ETF funds have resumed a continuous net inflow (currently only 3 days of positive inflow, totaling less than 200 million USD)

Market misconception: "Liquidity flood" is a false proposition.

The original user stated that "hot money may once again impact the prices of various assets," and this judgment has significant deviations:

Misunderstanding 1: Stopping QT = Opening the floodgates

In fact, the Fed is merely "stopping the drawdown" rather than "actively injecting liquidity". During the pandemic, QE involved purchasing $120 billion in bonds per month, while the current policy is simply "not selling anymore"; the impact of the two on asset prices differs by several orders of magnitude.

Myth 2: Asset prices will skyrocket immediately.

Cryptocurrencies are "tail risk assets" and are at the end of the liquidity transmission chain. The priority of traditional financial markets (U.S. stocks, U.S. bonds) is far higher than that of cryptocurrencies. Only when the S&P 500 breaks 6000 points and the VIX is below 15 will incremental funds overflow to BTC.

Misconception 3: "Data vacuum period + policy shift" leads to confusion

On the contrary, the permanent absence of October PCE data makes it impossible for the market to verify the reasonableness of interest rate cuts, and institutions will choose to "wait and see rather than bet." Powell's speech on December 2 will be the source of short-term volatility; if he intentionally adopts a hawkish stance to suppress expectations, BTC may test the $86,000 support again.

Investment Strategy: Capitalize on volatility rather than chasing trends.

1. Range trading interval

• Resistance level: $93,500 (maximum pain point for December options), where $1.8 billion in open contracts is concentrated, making it extremely difficult to break through.

• Support level: $88,500 (cost price for short-term holders), a drop below this will trigger $300 million in long positions liquidation.

• Operation: Buy low and sell high between $88,500 and $91,500, do not chase the price.

2. Options Hedging Strategy

• Sell the call option with a strike price of $95,000 expiring on December 27, for a premium of approximately $600

• Buy a put option with a strike price of $85,000 expiring on December 27, with a premium of approximately $800.

• Net cost of 200 USD, constructing a seagull protection strategy to lock in downside risk while earning time value.

3. Pay attention to opportunities in "policy expectation differences"

• If the interest rate cut on December 19 results in the dot plot showing only 2 rate cuts in 2026 (instead of the market expectation of 4), the market will make significant adjustments, and BTC may drop to 82000 USD — this would be the best entry point in the first half of the year.

4. Avoiding Altcoins

Although users mentioned Meme coins like $GIGGLE and $pippin, under macro uncertainty, the liquidity of altcoins will dry up first. In December, only BTC and ETH spot should be held, with leverage controlled within 3 times.

Core conclusion: Stopping the balance sheet reduction is "stanching the wound", not "blood transfusion".

The Fed's adjustment this time is a defensive operation in liquidity management, aimed at preventing a collapse of the money market, rather than actively stimulating a frenzy in risk assets. Regarding the cryptocurrency market:

• Favorability level: ⭐⭐⭐☆☆ (5-star system), far less than direct QE

• Effectiveness period: 3-6 months transmission period, rather than immediate effect.

• Core contradiction: Yen arbitrage trading unwinding (short-term pressure) > Fed stops QT (long-term support)

Survival rules for retail investors: Before the December monetary policy meeting, cash positions should not be lower than 50%. Stopping the balance sheet reduction has lowered systemic risk, but a real bull market requires seeing the Fed "actively expanding the balance sheet" rather than "passively stopping the reduction", needs to see ETF funds continuously net inflow of over $1 billion for 10 consecutive days, and needs to see the dollar index effectively break below 106. Before that, all rises are just rebounds, not reversals.

The horn of policy shift has sounded, but the wave of Liquidity has yet to arrive. Smart money is waiting for the market to transition from the critical point of "expected improvement" to "substantive improvement." #十二月行情展望 #百倍币种分享 #十二月降息预测 $BTC ‌$ETH ‌$GT ‌