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 the 1-year inflation expectation rose to 3.4% in December. This seemingly small figure has shattered the market’s hopes of the Federal Reserve continuing to cut interest rates. According to relevant information, the market’s probability expectation for a rate cut in December once reached as high as 85%, but has now fallen to 44%. Under the dual pressures of rising inflation expectations and chaotic employment data, the Federal Reserve is陷入an unprecedented policy dilemma—balancing inflation fighting and addressing cracks in the employment market. This macroeconomic predicament is accelerating the squeeze on liquidity in the cryptocurrency market.

What Rising Inflation Expectations Mean

The 1-year inflation expectation is a barometer of consumer confidence. When this number rises from lower levels to 3.4%, it indicates that market expectations for rising prices over the next year are strengthening. This typically reinforces the Fed’s hawkish stance—if inflation expectations remain high, a premature rate cut would be like pouring gasoline on the fire.

According to relevant information, there is already division within the Federal Reserve. Doves (such as New York Fed President Williams) believe that the widening cracks in the employment market require rate cuts to stimulate; hawks (such as Board Member Barr) insist that inflation still hovers above 3%, and now easing policy is too risky. Vice Chair Jefferson has simply chosen an ambiguous “slow approach.”

The Federal Reserve Faces Six Major Dilemmas

Former New York Fed President Dudley recently pointed out that the challenges facing the Fed in 2026 are far beyond market expectations:

Crypto Market Is Being “Abandoned”

A more direct threat comes from liquidity shifting away. According to relevant information, the US credit market hit a record high, high-yield bond ETFs rose about 9% in 2025, and stocks—especially AI and large tech stocks—continue to attract risk capital. However, Bitcoin fund inflows have stagnated, despite futures open interest reaching $61.76 billion, with prices hovering around $91,000.

CryptoQuant CEO Ki Young Ju’s observation is straightforward: funds have shifted into stocks and gold rather than cryptocurrencies. This isn’t because Bitcoin’s fundamentals have worsened, but because Fed policy uncertainty makes investors prefer “traditional safe-haven assets.”

Short-Term Outlook: Consolidation or Continued Pressure

Without major catalysts, Bitcoin may face prolonged consolidation. The Fed’s policy split, fluctuating inflation expectations, and delayed employment data all increase market uncertainty. Institutional investors like MicroStrategy, holding 673,000 BTC, have shown no signs of selling, indicating long-term holders are still committed. Spot Bitcoin ETFs also encourage long-term holding rather than short-term trading.

My personal view is that the current pressure on the crypto market is more due to macro liquidity diversion than deteriorating fundamentals. Once Fed policy clarifies, regulatory frameworks become clearer, or economic data shows a significant shift, liquidity may flow back in. Until then, patience might be the best strategy.

Summary

Rising inflation expectations to 3.4% are not an isolated event; they reflect the deep dilemmas faced by the Fed: policy division, chaotic data, and threats to independence. In this environment, short-term liquidity pressures in the crypto market are unlikely to ease. But in the long run, these challenges must be addressed, and policy adjustments during the process could become turning points for crypto assets. The key is patience, not panic.