Insights - MicroBit Capital Management Limited

On 10 Dec 2025 (ET), the Federal Reserve voted 9–3 to cut the federal funds target range by 25bp, from 3.75%–4.00% to 3.50%–3.75%, in line with market expectations. The three dissenting members underscored the internal tension: two preferred to keep rates unchanged, while one argued for a 50bp cut, highlighting ongoing disagreement over how to balance persistent inflation risks against signs of slowing growth.

Figure 1. Effective Federal Funds Rate (2022-2025)

Source: Federal Reserve Bank of New York, MicroBit, as of 15 Dec, 2025

The latest dot plot shows a rate path broadly unchanged from September. Twelve officials project further cuts, while seven see no need for additional easing and three even pencils in return to rate hikes, implying only one more cut in 2026 under the median path. Chair Powell stressed that the extent and timing of additional adjustments based on the incoming data, signaling a nimble, data‑dependent stance rather than a pre‑committed easing cycle.

Figure 2. Dot Plot Spot for Fed Funds Target Rate

Source: Bloomberg, MicroBit, as of 15 Dec, 2025

The Fed also revised its economic growth forecasts upward for the coming years. The 2026 GDP growth projection was raised from 1.8% to 2.3%, and the 2027 forecast was adjusted to 2.0% from 1.9%. We attribute this primarily to:

i) increased capital expenditure support from AI adoption,

ii) resilient consumer spending alongside potential contributions from anticipated IEEPA tariff reductions, and

iii) iii) a compensatory rebound from the temporary economic slowdown caused by the Q4 government shutdown.

Regarding the balance sheet, the Fed announced adjustments to maintain ample reserves. It will purchase $40bn in T-bills in Dec 2025 and sustain elevated levels in the coming months. This operational measure aims to support effective monetary policy implementation and smooth market functioning, specifically to mitigate potential liquidity strains during next April's tax season.

Looking ahead to 2026, although the official dot plot currently signals only one additional rate cut, we expect the number of cuts may exceed this projection. The main drivers are likely to be i) a softer real economy and labor market, ii) inflation converging further toward the target driven by tariff cut-off, and iii) a likely shift in the FOMC's composition toward more dovish members following upcoming rotations. We anticipate the cutting cycle could commence in late Q1 or Q2 of 2026, once the early‑year recovery has digested the lagged impact of the October–November government shutdown.

For the crypto market, BTC failed to sustain gains following the rate cut announcement, briefly spiking before quickly retreating. This reflects market pre-pricing of the event, representing a "sell-the-news" dynamic rather than a new bullish catalyst. Combined with ongoing deleveraging and bearish sentiment, BTC prices have remained under pressure.

Given its high beta, elevated volatility, and stronger correlation with the Nasdaq than with gold, BTC is more appropriately classified as a high-risk asset rather than a safe haven. Therefore, looking to 2026, a potential moderate Fed easing cycle should help lift valuations for BTC and similar risk assets by improving liquidity conditions. Furthermore, any final ruling that weakens IEEPA tariffs would help alleviate stagflationary pressures and improve the broader macroeconomic environment, providing more favorable fundamental support for BTC's risk-asset pricing.

Figure 3. Correlation Metrix of Main Assets

Source: Bloomberg, MicroBit, as of 15 Dec, 2025

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