Fed's Dovish-Hawk Divide Drives Crypto's Fragile Rally

The crypto market surged on Friday as New York Fed President John Williams hinted at the possibility of a December rate cut, reigniting speculation that the Federal Reserve may ease monetary policy to address persistent inflation concerns. Williams, a key voting member of the Federal Open Market Committee (FOMC), stated that monetary policy remains "modestly restrictive" but emphasized there is "room for a further adjustment in the near term" to bring the stance closer to neutral according to reports. His remarks, delivered at a Central Bank of Chile event, prompted traders to shift their bets to a nearly 60% probability of a 25-basis-point cut at the December 9-10 meeting according to analysts.

The move sent ripples across asset classes, with cryptocurrencies like Bitcoin and Ethereum rebounding after a week of heavy outflows. Bank of America's Michael Hartnett, a prominent strategist, argued that crypto's recent 35% decline for Bitcoin and 45% drop for Ethereum signaled a liquidity crunch that could force the Fed's hand. "The first sniff of Fed capitulation will be felt in crypto, the frontier of liquidity and speculation," Hartnett wrote in a weekly report according to his analysis. He also highlighted $2.2 billion in crypto fund outflows this week-the second-largest on record-as evidence of growing investor caution.

Yet, not all Fed officials shared Williams' dovish tone. Dallas Fed President Lorie Logan, who will regain a voting seat in 2026, urged patience, warning that further cuts could undermine progress on inflation. "It's too soon to assess the degree of restriction from the current policy stance," she said, noting that the FOMC's recent 25-basis-point reductions already risked overstimulation according to meeting minutes. Her comments underscored a widening divide within the FOMC, as reflected in the October meeting minutes, which revealed policymakers split between those favoring a pause, a 25-basis-point cut, or a 50-basis-point reduction.

Adding to the uncertainty, Mohamed El-Erian, a former Fed adviser, cautioned markets against overreacting to Williams' remarks. He warned that the Fed's data-dependent approach and the absence of October inflation data-delayed by the Bureau of Labor Statistics-could prolong internal disagreements according to market analysis. "Powell still faces an uphill battle convincing the FOMC to avoid a divisive December decision," El-Erian tweeted, noting that policy hawks like Boston Fed President Susan Collins have already signaled skepticism about additional cuts according to market commentary.

Despite the debate, Wall Street indexes edged higher as investors priced in a near 70% chance of a December cut, per the CME FedWatch Tool. The crypto rally, however, remained fragile, with Hartnett noting that a successful rate cut would likely bolster demand for zero-coupon Treasuries but warned that liquidity risks could resurface if the Fed delays action according to market analysis.