Analysis of the Roles of Fed Monetary Policy and Fiscal Policy in the Liquidity Cycle

• Main Tools
  : Federal funds rate, quantitative easing/tightening policies
• Transmission Channels
  : Affect borrowing costs and liquidity supply through the interbank market
• Current Status
  : Despite three consecutive interest rate cuts by the Federal Reserve, the effect of liquidity improvement is limited [1]

1. Bank Reluctance to Lend
   : Commercial banks’ willingness to take risks has decreased, hindering the transmission of monetary policy
2. Edge of Liquidity Trap
   : In a low-interest rate environment, the marginal effect of monetary policy diminishes
3. Strengthened Financial Regulation
   : Regulatory requirements such as the Basel Accords limit banks’ ability to expand credit

• Main Tools
  : Government spending, tax policies, direct subsidies
• Transmission Channels
  : Bypass the banking system and directly inject liquidity into the real economy
• Current Status
  : U.S. tariff revenue reached $226 billion in FY2025, a 150% year-on-year increase, and government spending remains strong [2]

1. Directness
   : Policy effects do not need to be transmitted through financial intermediaries
2. Precision
   : Can provide targeted support for specific areas or groups
3. Scale Effect
   : Large-scale fiscal spending can significantly improve overall liquidity levels

Analysis shows that since 2023, the year-on-year growth of Bitcoin has shown a complete divergence from the trend of the U.S. federal funds rate [1]. This divergence reveals new characteristics of the liquidity cycle:

1. Decoupling from Monetary Policy
   : The influence of traditional interest rate tools on market liquidity has weakened
2. Fiscal Policy Dominance
   : Government spending has become the main source of liquidity supply
3. Asset Pricing Reconstruction
   : Risk asset prices reflect fiscal expectations more than monetary policy

Based on the latest market data analysis:

• Bitcoin Price
  : $87,748.14, still below the previous high [0]
• Performance of Major Stock Indices
  : S&P 500 rose 1.61% during the period, Nasdaq rose 1.44% [0]
• Sector Rotation Characteristics
  : The utilities sector performed best (+2.11%), and defensive sectors were relatively resilient [0]

Asset Class	Recommended Allocation Ratio	Adjustment Reason
Money Market Funds	30%	High liquidity, low risk, to cope with uncertainty
Government Bonds	25%	Stable returns, low default risk
Utilities Stocks	20%	Strong defensiveness, stable dividends
High-Rated Bonds	15%	Controllable credit risk, better returns than government bonds
Cyclical Stocks	5%	Significantly reduce risk exposure
Tech Stocks	5%	Selective allocation, avoid over-concentration

1. Liquidity First
   : Increase allocation to money market funds and high-liquidity bonds to cope with market volatility
2. Return Stability
   : Utilities and high-rated bonds provide stable cash flow returns
3. Risk Control
   : Significantly reduce the allocation ratio of cyclical and growth stocks
4. Maintain Flexibility
   : Reserve a certain amount of funds to adjust promptly when liquidity improvement signals appear

Based on the liquidity framework analysis, it is recommended to focus on the following signals:

1. Bitcoin Breakthrough Upward
   (Weight 40%): Key signal as a liquidity proxy indicator
2. Recovery of Risk Appetite in U.S. Stocks
   (Weight 30%): Reflects overall market liquidity conditions
3. Narrowing of Credit Spreads
   (Weight30%): Indicates improvement in financing environment
4. Gold Price Stabilization
   (Weight20%): Signal of fading risk aversion
5. Falling Inflation Expectations
   (Weight30%): Creates space for monetary policy easing
6. Improvement in Bank Liquidity
   (Weight30%): Recovery of monetary policy transmission efficiency

: When 3 or more of the monitoring signals turn “strong”, consider gradually increasing risk asset allocation.

:

1. Phase1
   : Increase tech stock allocation from5% to10%
2. Phase2
   : Increase cyclical stock allocation from5% to15%
3. Phase3
   : Moderately increase growth stock allocation based on the degree of liquidity improvement

1. Strictly Implement Defensive Allocation
   : Adjust existing positions according to the recommended ratio
2. Closely Monitor Liquidity Signals
   : Establish a regular evaluation mechanism (monthly or quarterly)
3. Maintain Adequate Cash Position
   : Reserve flexible adjustment space for market opportunities

1. Dynamically Adjust Allocation
   : Gradually adjust risk exposure based on the degree of liquidity improvement
2. Focus on Policy Shifts
   : Focus on monitoring the coordination between fiscal and monetary policies
3. Layout Beneficiary Sectors
   : When signs of liquidity improvement are clear, layout beneficiary sectors in advance

From a long-term investment perspective, the current liquidity cycle is in a transition period of policy-dominated mode. Investors need to:

1. Reassess Risk Premium
   : Adapt to the asset pricing logic in the new liquidity environment
2. Build Counter-Cyclical Portfolios
   : Maintain relatively stable returns in different liquidity environments
3. Enhance Allocation Flexibility
   : Establish an adjustment mechanism that can quickly respond to policy changes

In the current liquidity environment, the decline in the transmission efficiency of monetary policy has made fiscal policy the main driver of liquidity. Investors should adopt a defensive allocation strategy, focus on the emergence of liquidity improvement signals, and fully prepare for future opportunities under the premise of ensuring safety.

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[0] Gilin API Data - Real-time market data and financial analysis
[1] Yahoo Finance - Bank of America: Fed Must Cut Rates; Bitcoin and Two Other Assets Will Benefit Most in 2026 (https://hk.finance.yahoo.com/news/流動性斷供危機逼近-美銀-fed必須降息-比特幣等三大資產2026年將最受益-204002062.html)
[2] Wall Street Journal - Trump Tariffs Bring… in FY2025 (https://cn.wsj.com/articles/trump-xi-tariffs-rare-earth-tech-economy-china-live-a883841d)