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Fed outlook for Q1 2026 puts Bitcoin and Ether at a crossroads

Written by Jon CuthbertPublished Dec. 26 2025Last Updated Dec. 26 2025

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Crypto markets are bracing for potential volatility in the first quarter of 2026 as investors assess the US Federal Reserve’s next policy steps.

The Fed delivered three interest rate cuts in 2025, mostly concentrated in the final quarter, as unemployment rose and inflation showed signs of easing.

Despite the dovish shift, Bitcoin, ether and major altcoins sold off rather than rallying.

Total crypto market capitalisation fell by more than $1.45 trillion from its October peak.

Analysts said the counterintuitive reaction highlighted that liquidity conditions now matter more than headline rate cuts.

Fed officials have signalled caution about easing further, citing persistent inflation risks.

I don’t personally have a sense of urgency to need to act further on monetary policy right now, because I think the cuts we’ve made have positioned us really well.

John Williams said.

I want to see inflation come down to 2% without doing undue harm to the labor market. It’s a balancing act.

Williams said.

November’s consumer price index reading of 2.63% has kept expectations for further rate cuts uncertain.

A record US government shutdown disrupted inflation data collection, adding to market hesitation.

Economists warned that data distortions may have reduced confidence in inflation trends.

As a result, crypto markets failed to respond positively to rate cuts in recent months.

Jeff Mei said a prolonged pause in rate cuts could pressure digital assets.

Bitcoin could drop to $70,000, and Ethereum could dip to as low as $2,400 if the Fed keeps rates steady throughout Q1 2026.

Jeff Mei said.

Analysts noted that crypto assets have become more sensitive to macroeconomic uncertainty.

Bitcoin and ether now trade more like risk assets than pure inflation hedges.

However, some policy actions could help cushion downside risks.

On December 1, the Federal Reserve formally ended quantitative tightening.

The central bank shifted to fully rolling over maturing Treasury and mortgage-backed securities.

This move halted further reserve drain from the financial system.

The Fed also launched Reserve Management Purchases worth around $40 billion in short-term Treasury bills.

Some analysts described the programme as a form of “stealth QE.”

During the 2020–2021 quantitative easing period, the Fed’s balance sheet expanded by roughly $800 billion per month.

That era coincided with a more than $2.90 trillion increase in total crypto market value.

While current purchases are smaller, they may still inject incremental liquidity.

Analysts said this could quietly stabilise crypto markets even without aggressive rate cuts.

Mei argued that continued liquidity support could underpin a rebound in digital assets.

This means Bitcoin could climb to $92,000–$98,000, supported by ongoing ETF inflows surpassing $50 billion and institutional accumulation.

Jeff Mei said.

Ethereum could push toward $3,600, benefiting from recent layer-2 scaling improvements and restaking yields that attract DeFi users.

Mei said.

Market participants said ETF inflows and institutional demand remain critical variables.

The outlook for Q1 2026 hinges on whether liquidity offsets restrictive policy signals.

Investors are increasingly watching balance-sheet actions rather than rate decisions alone.

Analysts said crypto markets will remain vulnerable if inflation pressures persist.

However, even modest liquidity injections could soften volatility.

As the Fed balances inflation and growth, crypto traders are preparing for a wide range of outcomes.

At the time of reporting, Bitcoin price was $87,380.54.