Original author: @Web3_Mario
Powell may be caught in the crossfire, as macro data is not sufficient to trigger market panic over monetary policy risks.
The FOMC interest rate decision early last Thursday met market expectations, concluding with a 25 basis point cut. The market generally attributed the decline in risk markets to two factors. First, the dot plot showed that there was no consensus among the members this time, with Cleveland Fed President Mester leaning toward keeping rates unchanged. In addition, the median target rate for 2025 was raised to 3.75% - 4.00%, compared to the previous median target rate of 3.25% - 3.5% in the September dot plot, reducing rate cut expectations from four times to two times. Additionally, the so-called dot plot refers to a charting tool used by the Fed to express policymakers' expectations for the future path of interest rates. It is part of the Summary of Economic Projections (SEP) released during the Federal Open Market Committee (FOMC) meetings, typically published four times a year, mainly used to observe the internal policy consensus of the Fed.
In addition, during the subsequent Q&A session, some of Powell's remarks were interpreted by the market as hawkish guidance, mainly comprising two aspects: first, he seems to express concern about the inflation outlook for the coming year, and second, regarding the establishment of Bitcoin reserves, the Fed's attitude did not show a positive response. However, after reading the full text, it feels that Powell's concern about inflation risks does not come from changes in certain macro indicators but more from the uncertainty associated with Trump's policies. At the same time, his outlook for the future economic landscape also reveals sufficient confidence.
Now let's take a look at why I say this. First, let's look at the changes in the US Treasury yield curve before and after the Fed's decision and related content. It can be seen that long-term rates indeed rose, but the impact on one-year yields is not significant, indicating that the market indeed has more concerns about the long-term economic outlook; however, at least the risks are not expected to occur in the short term.
From the prices of the 30-day federal funds futures contracts expiring on December 25, it can be seen that the market has actually reacted to the prospects of two rate cuts as early as November, so attributing the adjustment mainly to the Fed's future interest rate decision risks seems insufficiently grounded. Additionally, it should be noted that implied interest rates are calculated by subtracting the current futures price from 100.
Next, let's take a look at several sets of macro data, including the PCE index, non-farm payrolls and unemployment rate, as well as GDP growth details. It can be seen that the US PCE index has not shown a significant increase at least for some time, whether from the PCE year-on-year or the core PCE year-on-year growth rate, both remain below 2.5. At the same time, the University of Michigan's expected inflation rate also remains stable, and the unemployment rate has not shown a significant increase. Additionally, non-farm payrolls in November have increased compared to before, indicating a strong aspect of the job market. Considering Trump's tax cuts later, GDP growth has also stabilized and has not shown any significant decline in any specific detail. Therefore, from the perspective of macro data, there is no data to support the judgment of a resurgence of inflation or economic recession in the coming year. This suggests that Powell's concerns still stem from the uncertain policy effects of Trump.
Additionally, let me explain a point: the Dow Jones index has recorded a record consecutive decline. Some friends believe this reflects market pessimism about the future of American industrial development. However, upon further investigation, it seems that the main reason for this impact is not systemic risk but rather a significant downward revision from UnitedHealth. First, the Dow Jones Industrial Average (DJIA) is a price-weighted index, meaning that the impact of each component stock on the index depends on its absolute stock price, not market capitalization. This implies that higher-priced stocks will have a greater weight in the Dow. As of November 2, 2024, UnitedHealth's weight in the Dow was the highest at 8.88%, while its latest individual stock weight has dropped to 7.08%, with the stock price falling from $613 on December 4 to the current $500, a decline of 18%. Other high-weight stocks have not seen such declines, so the drop in the Dow is mainly due to the single-point risk from the high-weight stock UNH, rather than systemic risk. So what exactly happened with UNH? The primary trigger was that UNH's CEO, Brian Thompson, was shot multiple times outside the Hilton Hotel in Manhattan, New York, on December 5 and died after being taken to the hospital. The shooter, Luigi Mangione, had a good social background, and during the interrogation, it was revealed that his actions stemmed more from the public's exploitation by UNH in healthcare, triggering widespread sympathy in society and igniting the longstanding conflict over America's expensive healthcare costs. This also aligns with Trump's healthcare reform policy direction, and the resonance of these two factors led to a sharp drop in stock prices, which I will not elaborate on here.
Of course, regarding the small episode of Bitcoin reserves, I believe Powell's attitude is actually not very important. As he himself said, the decision to advance this proposal lies with the members of Congress, not the Federal Reserve. Meanwhile, referring to the establishment and management framework of US oil and gold reserves, the former is managed by the Department of Energy and the latter by the Treasury Department. Of course, the management process will involve collaboration with other departments, such as the SEC, CFTC, and the influence of the Fed's policies. However, in this process, these departments play more of a collaborative role.
So why did the market react so violently? I believe the main reason lies in Trump's strong pressure on the short-term spending bill in Congress last Wednesday, in collaboration with Musk, and the uncertainty triggered by the threat to abolish the debt ceiling rules ignited risk-averse sentiment.
Trump's overwhelming power threatens to permanently eliminate the debt ceiling, casting a shadow over the traditional US dollar credit system, prompting the market to engage in risk-averse trading.
I don't know how many friends noticed the game regarding short-term spending that occurred in the US Congress last week. On Tuesday, December 17, House Speaker Mike Johnson had reached a short-term agreement with the Democrats on government spending to extend government funding until March next year to avoid a government shutdown. At the same time, to ensure the passage of the bill, Johnson made some concessions to the Democrats and included several proposals supported by both parties. However, on December 18, Musk began to vehemently criticize the proposal on X, claiming that the proposal severely infringed on taxpayers' rights, leading to its rapid rejection.
At the same time, the entire process has also received Trump's support. Trump claimed on True Social that Congress needs to eliminate the ridiculous debt ceiling rules before January 20, when he officially takes office, because he believes these debt issues are caused by the Biden Democratic administration and should be resolved by him. Subsequently, the Republicans quickly amended the new spending bill, not only removing some compromise expenditures but also supplementing proposals to eliminate or suspend the debt ceiling. However, this proposal failed to pass in the House on Thursday (December 19) with 174 votes in favor and 235 votes against. This also raised the risk of a government shutdown. Ultimately, on December 20, the House finally passed a new temporary spending bill just hours before the deadline, which removed the proposal to amend the debt ceiling.
Although the new spending bill has been passed, avoiding partial government shutdowns, I believe Trump's expressed attitude toward the elimination of the debt ceiling has clearly raised market concerns. We know that Trump's power is the greatest among all US presidents, especially as he has gained absolute speaking rights in the House. The new congressmen will be sworn in and officially take office on January 3, greatly increasing the likelihood of passing the elimination of the debt ceiling. Therefore, let's analyze the impact brought about by this.
The US debt ceiling refers to the maximum legal amount that the US federal government can borrow, first established in 1917. This limit is set by Congress to restrict the growth of government debt. The purpose of the debt ceiling is to prevent excessive borrowing by the government, but in reality, it is not an effective means of controlling the debt level; rather, it is the upper limit of what the government can borrow legally. In addition to establishing fiscal discipline, the debt ceiling is also a significant weapon in the bipartisan struggle, as the opposition party often uses the risk of government shutdowns caused by criticizing the ruling party's spending bills to gain more bargaining chips.
Of course, the US debt ceiling has been suspended multiple times, usually through legislative means, with Congress passing bills to suspend the applicability of the debt ceiling. Suspending the debt ceiling means the government can continue to borrow without being restricted by the established limit until the deadline specified by the bill or until the debt reaches a certain new level. Typical examples include the following:
2011-2013: In 2011, the US faced a severe debt ceiling crisis. At that time, Congress and President Obama engaged in intense negotiations on how to raise the debt ceiling, ultimately reaching an agreement to temporarily raise the debt ceiling and implement some budget cuts. In addition, to avoid government default, in October 2013, Congress passed a bill that suspended the debt ceiling and allowed the government to borrow until February 2014. At that time, the US debt level was already close to the limit, and suspending the debt ceiling avoided the risk of government default.
2017-2019: In 2017, Congress again passed a bill to suspend the debt ceiling, allowing the government to continue borrowing until March 2019. This bill also included other fiscal matters and was linked to agreements on budget and government spending. This suspension allowed the US government to avoid potential default.
2019-2021: In August 2019, the US Congress passed a two-year budget agreement that not only raised the government spending limit but also suspended the debt ceiling, allowing the government to borrow more money until July 31, 2021. This suspension allowed the government to continue borrowing without being constrained by the debt ceiling, ensuring the normal operation of the government and avoiding a government shutdown and debt default.
2021: In December 2021, to avoid a US government default, Congress passed a temporary adjustment bill for the debt ceiling, raising the debt ceiling to $28.9 trillion and allowing the government to borrow until 2023. This adjustment was made at the last minute before the deadline in October 2021, avoiding the risk of debt default.
We can see that each suspension of the debt ceiling is to respond to certain special events, such as the 2008 financial crisis and the pandemic in 2021. But why does the re-proposal to eliminate the debt ceiling at this time cause such an impact? The core issue lies in the current scale of US debt. Currently, the ratio of US public debt to GDP has reached a historical high of over 120%. If the debt ceiling is abolished at this time, it means that the US will not be bound by any fiscal discipline for a long period of time, which has an unpredictable impact on the US dollar credit system.
So why does Trump need to do this? The reason is simple: to navigate the short-term risk of a debt crisis. We already know that Trump's governance focus includes two of the most important goals: tax cuts and reducing public debt. However, while tax cut policies can boost economic vitality, they inevitably lead to a reduction in government revenue in the short term. Of course, the resulting fiscal gap could potentially be compensated by increasing tariffs, but considering that manufacturing countries can respond by lowering exchange rates, this is why the US dollar index has remained strong during the recent rate-cutting cycle. The core issue is that countries are preparing for potential trade wars. Meanwhile, cuts in fiscal spending may lead to a decline in domestic enterprises' earnings, casting a shadow over economic growth potential. Therefore, to navigate this painful policy implementation period, Trump naturally hopes to solve this problem once and for all. Thus, eliminating the shackles of the debt ceiling and temporarily relying on continued borrowing to navigate the fiscal crisis seems very appropriate.
Finally, let's look at why it will affect cryptocurrencies. I think the core issue is the blow to the narrative of Bitcoin reserves. In the recent core narratives of cryptocurrencies, the establishment of Bitcoin reserves by the US to solve the debt crisis is a relatively important part. However, if Trump directly abolishes the debt ceiling rules, it indirectly undermines the value of that narrative. In previous analyses, we have already pointed out that the current cryptocurrency market is at a stage of seeking new value support, so it is easy to understand that this has led to profit-taking and risk aversion. Therefore, I believe that in the coming period, observing the policies of Trump's team will obviously take precedence over other factors and requires continuous attention.