Author: @Web3_Mario
Summary: The cryptocurrency market experienced a significant pullback last week, which is generally attributed to Federal Reserve Chairman Powell's so-called 'hawkish rate cut' that sparked concerns in risk markets regarding inflation and economic recession. However, according to my analysis, this is perhaps only a secondary factor causing capital panic; the real impact stems from Trump's strong pressure on the short-term spending bill in Congress, initiated together with Musk last Wednesday, where he even threatened to abolish the debt ceiling rules, creating uncertainty that ignited the risk aversion in capital.
Powell may face blame; macro data is not sufficient to trigger market panic over monetary policy risks.
Last Thursday morning's FOMC interest rate decision met market expectations, concluding with a 25 basis point reduction. The market generally attributed the decline in risk markets to two factors. Firstly, the dot plot showed that there was no consensus among the members this time, with Cleveland Fed President Loretta Mester leaning towards maintaining the interest rate. Additionally, the median target interest rate for 2025 was raised to 3.75% - 4.00%, compared to the previous median target of 3.25% - 3.5% in the September dot plot, with interest rate cut expectations reduced from 4 times to 2 times. To add a bit more context, the so-called dot plot is a charting tool used by the Federal Reserve to express policymakers' expectations for the future path of interest rates. It is part of the Summary of Economic Projections (SEP) released during Federal Open Market Committee (FOMC) meetings, typically published four times a year, and is mainly used to observe the policy consensus within the Fed.
Additionally, during the subsequent Q&A session, some of Powell's remarks were interpreted by the market as hawkish guidance, mainly consisting of two aspects: first, he seemed to express concern about the inflation outlook for the coming year, and secondly, regarding the establishment of Bitcoin reserves, Powell did not provide a positive response. However, after reading the full text, it feels that Powell's concerns about inflation risk do not stem from changes in certain macro indicators, but rather from the uncertainty surrounding Trump's policies. Meanwhile, he also conveyed enough confidence in the outlook for the economy.
Next, let’s look at the changes in the yield curve of U.S. Treasury bonds before and after the Fed's decision and related disclosures. It can be seen that long-term rates did indeed rise, but the impact on the 1-year yield was not significant, indicating that the market does have more concerns about the long-term economic outlook, but at least the risks are not expected to occur in the short term.
From the price of the 30-day federal funds futures contract expiring in December 2025, it can be seen that the market had already reacted to the prospect of two future interest rate cuts as early as November. Therefore, attributing the pullback primarily to the Fed's future interest rate decision risk seems insufficiently justified. Additionally, the calculation of implicit interest rates is done by subtracting the current futures price from 100.
Next, let’s look at several macroeconomic data sets, including the PCE index, non-farm payrolls, the unemployment rate, and GDP growth details. It can be seen that the U.S. PCE index has not shown any significant increase over the past period, whether viewed from the PCE year-on-year or the core PCE year-on-year growth, both of which have remained below 2.5. Meanwhile, the Michigan inflation expectations remain stable, and there has not been a noticeable increase in the unemployment rate. Additionally, non-farm payrolls in November showed an increase compared to before, indicating a strong employment market. Considering Trump's forthcoming tax cuts and the overall stability of GDP growth without any significant decline in any particular detail, from a macroeconomic data perspective, there is no data to support the judgment of a resurgence of inflation or an economic recession in the coming year. This indicates that Powell's concerns still stem from the uncertain effects of Trump's policies.
Here, I would like to explain one more point. The Dow Jones index has recorded a consecutive decline, and some friends believe that this reflects a pessimistic outlook for the future development of American industry. However, upon further investigation, it appears that the main reason for this impact is not systemic risk, but rather a significant downgrade from UnitedHealth Group. Firstly, the Dow Jones Industrial Average (DJIA) is a price-weighted index, which means that the price of each component stock affects the index based on its absolute stock price, not its market capitalization. This implies that higher-priced stocks will have a greater weight in the Dow. As of November 2, 2024, UnitedHealth Group had the highest weight in the Dow at 8.88%. However, in the latest individual stock weights, UNH's weight has dropped to 7.08%, with its stock price falling from 613 on December 4 to the current 500, a decrease of 18%. Other high-weight stocks have not seen such a decline. Therefore, the main reason for the Dow's decline is the single-point risk from the high-weight stock UNH, rather than systemic risk. So what actually happened to UNH? The main trigger was the assassination of UNH's CEO, Brian Thompson, who was shot multiple times outside a Hilton hotel in Manhattan, New York, on December 5. The shooter, Luigi Mangione, had a good social background, and the interrogation revealed that his actions stemmed more from a belief that UNH exploited the American public in terms of healthcare, which sparked widespread sympathy in society and ignited the long-standing conflict over high healthcare costs in the U.S. This resonates with Trump's healthcare reform policy direction, which led to a sharp drop in stock prices, but I will not elaborate on this here.
Regarding the small episode of Bitcoin reserves, I believe Powell's attitude is actually not very important. As he himself said, the power to advance this proposal lies with the members of Congress, not the Federal Reserve. At the same time, referring to the establishment and management framework of U.S. oil and gold reserves, the former is managed by the Department of Energy, while the latter is managed by the Department of the Treasury. 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, during this process, these departments play a more collaborative role.
So why did the market react so violently? The main reason, in my opinion, is Trump's strong pressure on the short-term spending bill in Congress, initiated together with Musk last Wednesday, where he even threatened to abolish the debt ceiling rules, creating uncertainty that ignited risk aversion in capital.
Trump's overwhelming power threatens to permanently abolish the debt ceiling, casting a shadow over the traditional dollar credit system, prompting the market to start risk-averse trading.
I wonder how many of my friends noticed the struggle in the U.S. Congress regarding short-term spending that occurred last week. On Tuesday, December 17, House Speaker Mike Johnson had reached a short-term agreement with the Democrats on government spending, extending government funding until March of the following year to avoid a government shutdown. Meanwhile, to facilitate the bill's passage, Johnson made some concessions to the Democrats and attached several bipartisan-supported bills. However, on December 18, Musk began to fiercely criticize the proposal on X, arguing that it severely infringed on taxpayers' rights, leading to the proposal's swift rejection.
At the same time, the entire process also received Trump’s support, as he claimed on True Social that Congress needs to abolish the ridiculous debt ceiling rules before he officially takes office on January 20, arguing that these debt issues were caused by the Biden administration and should be resolved by him. Subsequently, the Republicans quickly revised the new spending bill, not only removing some compromised expenditures but also supplementing proposals to abolish 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, which also triggered 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 modify the debt ceiling.
Although the new spending bill was passed, avoiding a partial government shutdown, I believe Trump's expressed attitude towards abolishing the debt ceiling has clearly raised market concerns. We know that Trump has more power than any previous U.S. president, especially having gained absolute authority in the House of Representatives. The new congressmen will be sworn in and officially take office on January 3, significantly increasing the likelihood of passing the proposal to abolish the debt ceiling. Therefore, let’s analyze the implications of this.
The U.S. debt ceiling refers to the maximum legal amount that the U.S. 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 government borrowing, but it is not an effective means of controlling the debt level, rather it is the upper limit of the government’s legal borrowing capacity. Besides establishing fiscal discipline, the debt ceiling is also a very important weapon in the bipartisan game, where often the opposition party uses the risk of government shutdown caused by attacking the ruling party's spending bills to gain more negotiation leverage.
Of course, the U.S. debt ceiling has been paused many times, usually through legislative means, with Congress passing bills to suspend the application of the debt ceiling. Suspending the debt ceiling means that the government can continue to borrow without being subject to the set limit until the deadline specified in the bill or until the debt reaches a new level. Some typical examples are as follows:
2011 -2013: In 2011, the U.S. faced a serious 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 take some budget-cutting measures. Additionally, 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 U.S. debt level was already close to the ceiling, 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 tied to agreements on the budget and government spending. This suspension allowed the U.S. government to avoid potential default.
2019 -2021: In August 2019, Congress passed a two-year budget agreement that not only raised the government spending cap 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 the constraints of the debt ceiling, ensuring the normal operation of the government and avoiding government shutdowns and debt defaults.
2021: In December 2021, to avoid a default by the U.S. government, Congress passed a temporary adjustment bill for the debt ceiling, raising it to $28.9 trillion and allowing the government to borrow until 2023. This adjustment was made at the last moment before the deadline in October 2021, avoiding the risk of a debt default.
It can be seen that each suspension of the debt ceiling is meant to address certain special events, such as the financial crisis of 2008 and the pandemic in 2021. But why would the re-proposal to abolish the debt ceiling have such an impact at this time? The core issue lies in the current scale of U.S. debt. The ratio of U.S. public debt to GDP has reached a historical high, exceeding 120%. If the debt ceiling were abolished at this time, it would mean that the U.S. would not be bound by any fiscal discipline for a long period, which would have an unpredictable impact on the credit system of the dollar.
So why does Trump need to do this? The reason is simple: to get through the short-term debt crisis risk. We already know that reducing taxes and lowering public debt are two of Trump's most important goals. However, while tax cuts can boost economic vitality, they will inevitably lead to a decrease 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 explains why the dollar index remains strong during the recent rate cutting cycle. The core issue is that countries are preparing for potential trade wars. At the same time, the potential decline in domestic company profits due to fiscal spending cuts also casts a shadow over economic growth potential. Therefore, to get through this painful policy implementation period, Trump certainly hopes to resolve this issue once and for all, making it very suitable to abolish the constraints of the debt ceiling and rely on continued borrowing to get through the fiscal crisis in the short term.
Finally, let's look at why this would impact cryptocurrencies. I believe the core issue lies in the blow to the narrative surrounding Bitcoin reserves. We know that establishing Bitcoin reserves to address debt crisis issues has been a significant part of the recent core narrative in cryptocurrencies. However, if Trump directly abolishes the debt ceiling rules, it indirectly undermines the value of that narrative. In previous analyses, we have already noted that the current cryptocurrency market is in a phase of searching for new value support, making it understandable that profit-taking and risk aversion would occur. Therefore, I believe that for the foreseeable future, observing the Trump administration's policy actions will take precedence over other factors and requires continuous attention.
