The Federal Reserve has spent much of the past year carefully adjusting policies to counter a cooling job market with persistent inflation, delivering three solid rate cuts that brought the federal funds rate down to 3.50%-3.75%.
And yet the most recent December meeting carried a hawkish tone that caught markets off guard, leading to sell-offs in Bitcoin and Ethereum as traders adjusted expectations for slower future relief.
We believe that the current situation sets the stage for a make-or-break Q1 2026, with FOMC meetings scheduled for January 28-29, March 18-19, and May 6-7 acting as key pivot points that could either fuel a crypto resurgence or trigger another downturn.
Crypto assets have always been highly sensitive to Fed policy, and the sentiment as of late is that the Fed is skittish about cutting rates further for fear of fueling inflation, which has yet to come down to its target rate of 2%.
But even without aggressive cuts, the Fed is pivoting to alternative tools like purchases of Treasury bills to inject liquidity.
The Federal Reserve ended quantitative tightening on December 1, 2025, shifting to full rollovers of maturing Treasury and MBS principal payments to stabilize its balance sheet and prevent reserve drainage.
Starting December 12, it launched “Reserve Management Purchases” (RMPs) of short-term Treasury bills, targeting ~$40 billion initially to ease money market stresses like rising repo rates amid year-end demands.
A continuation of this policy could inject net liquidity without full QE, with elevated purchases (~$20-25B/month) continuing into Q1 2026 before tapering. This supports steadier funding for markets, indirectly benefiting crypto through lower volatility and risk appetite.
Such a backdoor stimulus could incite a bull run even if rate cuts fall short of expectations.
Base Case: Single Rate Cut + Steady Rate of Treasury Purchases
The most probable path involves a single 0.25% rate cut at the January meeting, followed by a hold through March as core inflation settles near the Fed’s 2% target and unemployment stabilizes around 4.2%.
The September 2025 dot plot already forecasted just one cut for the entire year ahead, with rates ending around 3.4%, signaling caution amid potential tariff impacts from the new administration.
To compensate for limited rate relief, we expect the Fed to continue Treasury buybacks, unleashing liquidity without fanfare.
For crypto, this means Bitcoin could climb to $92,000-$98,000, supported by ongoing ETF inflows surpassing $50 billion and institutional accumulation.
Ethereum could push toward $3,600, benefiting from recent layer-2 scaling improvements and restaking yields that attract DeFi users.
In such a scenario, patient holders could win big from slowly accumulating holdings.
Bull Case: Two Rate Cuts + Increased Treasury Purchases
Should incoming data show further labor market softening—say, unemployment breaching 4.5%—or deflationary pressures pushing CPI under 2%, the Fed could deliver two swift 0.25% cuts by June, dropping rates to 3.00%-3.25%.
If the Fed scales Treasury buybacks, it could incite a liquidity tsunami: banks flush with cash lend freely, corporations issue debt cheaply, and investors rotate en masse into high-upside plays.
Supported by continued deregulation efforts, this combo would propel Bitcoin past $125,000. Ethereum could surge to $4,800, supercharged by spot ETF momentum, total value locked surging, and real-world asset tokenization drawing billions from traditional institutional investors.
The total crypto market could balloon by 25-35% to $4 trillion, sparking an altseason where Solana eclipses $300, meme coins make a resurgence, and even niche tokens like AI-focused projects multiply.
Bear Case: Resurgent Inflation Causes Fed to Do Nothing
If inflation proves stubborn due to supply chain snarls, wage stickiness, or escalating tariffs, the Fed might skip cuts entirely in Q1, anchoring rates at 3.50%-3.75% well into May while Powell’s term expiration adds leadership uncertainty.
Treasury buybacks would stay minimal—perhaps just rollovers without net expansion—leaving liquidity tight.
In this scenario, equities would waver, and crypto would get hit hard. Bitcoin could plunge to $70,000 as ETF outflows accelerate, and Ethereum could dip to $2,400.
To hedge, it might be worthwhile for investors to keep a large stack of funds in stablecoins and wait for Bitcoin to drop to $65K to buy the dip.
Conclusion
Ultimately, Q1 2026 will be dependent on weekly jobs reports, CPI prints, and geopolitical noise—Fed speeches and rumors could cause markets to spike or dump in the blink of an eye.
We believe that, even in the face of persistent inflation, the Fed has to deploy tools to fight growing unemployment and tepid growth.
This, combined with continued deregulation efforts and the pending appointment of a (likely) dovish Fed Chairman in May, could lead to a sustained rally.
