Bitcoin Rally Paused: Fed Policy and US Economic Slowdown Weigh on Price
The recent Bitcoin (BTC) rally has encountered significant resistance around the $90,000 mark, prompting a wave of analysis regarding the underlying causes. While speculation about market manipulation and concerns surrounding the artificial intelligence (AI) sector circulate, a more fundamental shift in investor sentiment appears to be at play. Strong demand for US Treasurys, coupled with diminishing expectations of aggressive Federal Reserve (Fed) rate cuts, is driving capital towards safer assets, effectively capping Bitcoin’s upside potential. This article delves into the key factors contributing to this pause, examining the macroeconomic landscape and its impact on the leading cryptocurrency.
Shifting Investor Sentiment: A Flight to Safety
Traditionally, Bitcoin has been touted as a hedge against inflation and economic uncertainty. However, recent market behavior suggests that gold is currently fulfilling that role more effectively. The S&P 500, while still near its all-time high, is showing signs of vulnerability, trading just 1.3% below its peak. In contrast, Bitcoin remains approximately 30% below its October high of $126,200. This divergence highlights a growing risk aversion among traders, undermining the narrative that fears of an AI bubble are solely responsible for broader market weakness.
The preference for gold is visually evident when comparing its performance against Bitcoin (see image below). Gold’s resilience in the face of economic headwinds demonstrates its continued status as a safe-haven asset, attracting investors seeking stability during times of uncertainty.
Source: TradingView
The Fed's Impact: Liquidity and Interest Rate Expectations
A significant factor limiting Bitcoin’s ascent has been the US Federal Reserve’s balance sheet reduction throughout much of 2025. This policy aims to drain liquidity from financial markets, creating a less favorable environment for risk assets like Bitcoin. While the trend briefly reversed in December due to deteriorating job market data and weaker consumer spending, the overall impact remains restrictive.
The CME FedWatch Tool indicates a declining probability of interest rate cuts. As of Friday, the odds of a cut at the January 28th FOMC meeting fell to 22%, down from 24% the previous week. Furthermore, the sustained demand for US Treasurys, with the 10-year yield holding steady at 4.15%, signals continued risk aversion and limits the potential for lower rates to stimulate risk-on assets.
Source: CME FedWatch Tool
Quantitative Tightening and its Ripple Effects
The Fed’s quantitative tightening (QT) policy directly impacts Bitcoin by reducing the overall liquidity available in the market. Less liquidity translates to less capital flowing into riskier investments, including cryptocurrencies. The uncertainty surrounding the Fed’s future actions, particularly its ability to cut interest rates below 3.5% in 2026, further exacerbates this situation.
Weakening Economic Data: US and Japan
Recent economic data releases have added to the bearish sentiment surrounding Bitcoin. Several major retailers, including Target, Macy’s, and Nike, have lowered their earnings outlooks, citing inflationary pressures and weakening consumer spending. Historically, reduced consumer spending creates a challenging environment for risk assets.
The economic situation in Japan is also contributing to global uncertainty. Japan’s annualized GDP contracted by 2.3% in the third quarter, despite maintaining negative interest rates for over a decade and relying on currency depreciation to stimulate growth. Weak demand for Japanese government debt has increased contagion risks, as the country faces 10-year bond yields above 2% for the first time since 1999. Japan holds the world’s fourth-largest Gross Domestic Product, and its economic struggles have global implications.
Bitcoin's Correlation and the Search for a Hedge
While Bitcoin’s correlation with traditional markets has been decreasing, it doesn’t mean cryptocurrency investors are immune to broader economic conditions. The weakening economic data and increased risk aversion are impacting investor behavior across all asset classes.
Source: TradingView
Despite Bitcoin’s decentralized nature and long-term potential, it has struggled to establish itself as a reliable hedge against economic downturns in the short term. The current environment highlights the importance of considering macroeconomic factors when evaluating Bitcoin’s price movements.
The DATs and mNAV Rollercoaster
Recent volatility in Decentralized Autonomous Tender (DATs) and the net asset value (mNAV) of certain crypto products, as highlighted in recent Finance Redefined reports, further contributes to market uncertainty. These fluctuations add another layer of complexity for investors already grappling with macroeconomic headwinds.
Looking Ahead: What's Next for Bitcoin?
Bitcoin’s struggle to break above the $90,000 level reflects the prevailing uncertainty surrounding global growth and the weakening US labor market. As investors prioritize capital preservation, the positive impact of potential interest rate cuts and stimulus measures on risk-on assets diminishes. Even if inflation were to reaccelerate, Bitcoin is unlikely to serve as a compelling alternative hedge in the near term.
The current market conditions suggest a period of consolidation for Bitcoin. Investors are likely to remain cautious until there is greater clarity regarding the Fed’s monetary policy and the trajectory of global economic growth. Monitoring key economic indicators, such as inflation data, employment figures, and consumer spending, will be crucial for understanding the future direction of Bitcoin’s price.
Disclaimer: This article is for general information purposes only and does not constitute financial advice. The views expressed herein are solely those of the author and should not be taken as investment recommendations. Cryptocurrency investments are inherently risky, and readers should conduct thorough research and consult with a qualified financial advisor before making any investment decisions.
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