Global markets are once again fixated on the Federal Reserve’s December interest rate decision, with investors split over whether policymakers will deliver another cut. Earlier expectations of easing—driven by softer inflation and weaker labor data—have cooled sharply after a series of hawkish remarks from Fed officials. Even recent dovish signals have failed to settle the debate, leaving traders on edge.
Liquidity Pressures Mount
A new report from Michael Hartnett, Chief Investment Strategist at Bank of America (BAC-US), argues that tightening liquidity is already weighing on multiple asset classes. Cryptocurrencies, credit markets, the U.S. dollar, and private equity have all shown signs of hitting "liquidity peaks."
Hartnett notes that weakness in U.S. bank stocks resembles conditions seen in December 2018, when liquidity-sensitive sectors forced the Fed into a more accommodative stance. He warns that similar pressures could push the Fed toward easing again.
Global Context
This year alone, global central banks have cut rates 316 times, fueling speculation across asset classes—from the AI investment boom to sharp swings in Japanese equities and crypto markets. Hartnett predicts that by 2026, the Fed may face a "policy capitulation," launching a new rate-cutting cycle.
According to Bank of America, three asset classes stand to benefit most:
- Long-term zero-coupon bonds, which gain from lower rates and valuation premiums.
- Bitcoin, highly sensitive to liquidity shifts and often leading rallies before policy intervention.
- U.S. mid-cap stocks, which are tied to financing costs and could see profit growth and catch-up rallies after easing.
Japan’s Debt Crisis Adds Pressure
Liquidity concerns are not confined to the U.S. Japan’s 30-year government bonds have fallen 12% year-to-date, their worst performance since the 1970s. The yen is nearing 160 per dollar, a 40-year low.
The Bank of Japan faces a dilemma: raising rates risks a stock market crash, while maintaining loose policy continues to pressure the currency and bonds. The mismatch between fiscal stimulus—equivalent to 3% of GDP—and negative real policy rates has intensified risks. Carry trade unwinding is now spreading stress globally, threatening dollar liquidity and risk assets from U.S. equities to crypto.
Mid-Cap Divergence
In the U.S., mid-cap stocks highlight the disconnect between valuations and performance. Trading at just 15 times earnings, they have yet to benefit from easing trade tensions and manufacturing reshoring. Hartnett argues this reflects the Fed’s lagging policy response to market demand.
The Bottom Line
Bank of America’s warning is clear: liquidity-sensitive sectors are flashing red, and the Fed may be forced to cut rates more aggressively in 2026. When that happens, Bitcoin, zero-coupon bonds, and mid-cap stocks could be the biggest winners.
For now, investors face a market caught between hawkish Fed rhetoric and mounting evidence of tightening liquidity. If history is any guide, policy "surrender" could open the door to significant revaluation opportunities across risk assets.