Inflation expectations rise to 3.4%, Fed rate cut dreams shattered, crypto market liquidity crisis worsens

The latest data from the New York Fed shows that inflation expectations for 1 year have risen to 3.4% as of December 1st, while the 5-year expectations remain steady at 3%. This seemingly insignificant data change is actually rewriting market expectations—the window for the Federal Reserve to cut interest rates is closing, and the cryptocurrency market is facing a liquidity crunch.

Rising Inflation Expectations, Broken Rate Cut Expectations

The true meaning behind the data

The New York Fed’s consumer expectation survey is an important reference for Fed decision-making. The 1-year inflation expectation has increased to 3.4% from last month, indicating that ordinary Americans expect prices to remain relatively high over the next year. In contrast, the 5-year inflation expectation remains at 3%, reflecting market expectations for long-term inflation to stay stable.

This divergence is crucial. The rise in short-term inflation expectations directly weakens the rationale for the Fed to further cut rates. The market had previously bet that the Fed would continue to cut rates in 2026, but after this data was released, the expectation of rate cuts dropped from 85% to 44%. Fed Chair Powell faces a dilemma: continuing to cut rates might fuel inflation expectations, but halting rate cuts could increase employment pressures.

The Fed’s policy dilemma

According to related reports, the Fed is internally divided into two camps: doves believe that a cooling labor market requires rate cuts for support, while hawks insist that inflation remains above 3% and high interest rates should be maintained. The rising inflation expectations undoubtedly give hawks more influence.

More complex is the employment data gap caused by the US government shutdown, which leaves the Fed with an unclear picture of the true labor market conditions. Under this uncertainty, the Fed has chosen to “proceed cautiously” with policy adjustments, which essentially means the rate cut cycle may be coming to an end.

Liquidity Crisis in the Crypto Market

Capital Flight

When the expectation of rate cuts is shattered, risk assets are the first to be affected. According to the latest data, the US high-yield bond distress index has fallen to a historic low of 0.06, indicating ample liquidity in the credit market. But this abundance actually signals capital flowing out of risk assets.

A more straightforward phenomenon is that traditional assets like stocks and gold are attracting large amounts of capital, while the Bitcoin market remains stagnant. Despite open interest in futures contracts reaching $61.76 billion, Bitcoin’s price hovers around $91,000, lacking upward momentum.

Institutional investors’ “Apathy”

Institutions holding 673,000 Bitcoins (such as MicroStrategy) have shown no signs of selling, indicating they are waiting. Waiting for what? For clearer Fed policies, for market dynamics post-halving, for the next major catalyst. But in the current environment of rising inflation expectations and no hope for rate cuts, this wait could be very long.

The Deep Logic of the Liquidity Paradox

This is the so-called “liquidity paradox”: global liquidity is abundant, yet the crypto market faces a liquidity crunch. The reason is simple— in an environment where rate cut expectations have collapsed and risk assets are losing appeal, capital prefers safer assets like stocks and gold over more volatile cryptocurrencies.

Key Points to Watch Moving Forward

Inflation expectations are not fixed. In the coming months, the market should pay attention to several key data points:

• Whether US CPI data for January and beyond continue to rise
• Latest speeches from Fed officials, hinting at potential policy shifts
• The true state of employment data, and whether it can support a hawkish stance
• The impact of global geopolitical developments on commodities and inflation

If inflation expectations continue to rise, the Fed may be forced to keep interest rates high longer, further suppressing the upside potential of the crypto market. Conversely, if subsequent data shows easing inflation pressures, rate cut expectations could re-emerge, and the crypto market may see new capital inflows.

Summary

The rise in inflation expectations from the New York Fed essentially reflects a re-pricing of market expectations regarding Fed policy shifts. In the short term, this puts pressure on the crypto market: the collapse of rate cut expectations means reduced attractiveness of risk assets, with capital flowing into stocks and gold, and Bitcoin falling into a liquidity crunch.

But this is not necessarily bad news. The stability of institutional holdings indicates they are waiting for opportunities rather than giving up. Once Fed policies shift—whether due to better inflation data or increased employment pressures—there is potential for a market reversal. The key is to be patient and wait for the next major catalyst.