On December 1st, the Fed took an action - the balance sheet reduction was paused.

In plain terms: the machine that has been pulling money out of the market for the past few years has suddenly stopped working. The aftermath of the crazy liquidity injections during the pandemic was being slowly digested, but now the pace has changed.

Why brake at this time?

On the surface, inflation is still hovering above 3%, which is still a distance from the target. However, economic growth is slowing down, and employment data is not as exuberant as before. The Fed is now like a person riding a bicycle uphill - continuing to tighten, afraid of falling down if they can't keep going; completely easing, yet worried about losing control of the speed. Being stuck in the middle has become an unavoidable balance point.

However, there is a hidden script: financial strain.

In the past few years, the Fed has bought a massive amount of government bonds, essentially providing support for the fiscal deficit. If it continues to aggressively taper, government bond yields will rise, and the government will struggle to bear the interest on its debt. Therefore, this pause also gives the fiscal side some breathing room. Monetary policy and fiscal policy have always needed to work in tandem.

What about the cryptocurrency market?

In the short term, it's just a warm breeze. The period of tight liquidity may come to an end, alleviating pressure on high-volatility assets like Bitcoin and Ethereum. But don't rush to pop the champagne— the Fed's balance sheet has increased by nearly two trillion since before the pandemic. There isn't really less money; it's just been drawn out less aggressively.

In this environment, the market is prone to differentiation: strong assets may become stronger, while weak ones continue to remain flat. Improvement in liquidity does not equal a broad rise; one must see clearly where the money is flowing.