Author: @Web3_Mario
Abstract: The cryptocurrency market experienced a large pullback last week, which was generally attributed to the so-called "hawkish rate cut" by Federal Reserve Chairman Powell, which triggered concerns in the risk market about inflation and economic recession. However, according to the author's analysis, this is probably only a secondary factor causing capital panic. The real impact lies in the strong pressure on Congress's short-term spending bill initiated by Trump and Musk last Wednesday, and even the uncertainty caused by threatening to cancel the debt ceiling rule, which triggered the risk aversion of funds.
Powell may be caught in the crossfire. Macro data is not enough to cause the market to panic about monetary policy risks.
Last Thursday morning's FOMC rate decision met market expectations, ending with a 25 basis point reduction. The market generally attributed the decline in risk markets to two factors: first, the dot plot indicated that there was no unanimous agreement among the members this time, with Cleveland Fed President Mester leaning towards keeping rates unchanged. Additionally, the median target rate for 2025 was raised to 3.75%–4.00%, compared to the previous September's median target rate of 3.25%–3.5%. The expectation for rate cuts was reduced from four times to two. Here, it’s worth mentioning that the dot plot refers to a graphical tool used by the Federal Reserve to express policymakers' expectations for future interest rate paths. It is part of the Summary of Economic Projections (SEP) released during Federal Open Market Committee (FOMC) meetings, typically published four times a year, primarily 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 containing two aspects: first, a seemingly worried attitude towards the inflation outlook for the coming year; secondly, regarding the establishment of a Bitcoin reserve, Powell did not give a positive response. However, after reading the full text, it felt that Powell's concerns about inflation risk did not stem from changes in certain macro indicators, but rather from the uncertainty associated with Trump's policies. At the same time, his outlook on the future economic prospects also revealed sufficient confidence.
Now let's look at why I say this. First, let's examine the changes in the U.S. Treasury yield curve before and after the Federal Reserve's decision and related content was made public. It can be seen that long-term rates indeed rose, but the impact on the 1-year yield was not significant, indicating that the market is indeed more concerned about the long-term economic outlook, but at least the risk is not expected to occur in the short term.
From the prices of 30-day federal funds futures contracts expiring on December 25, it can be seen that the market had actually reacted in advance to the outlook for the two future rate cuts as early as November. Therefore, attributing the correction primarily to the Federal Reserve's future interest rate decision risks seems insufficiently grounded. Additionally, the implied interest rate is calculated by subtracting the current futures price from 100.
Next, let's look at several sets of macro data: the PCE index, non-farm payrolls, unemployment rate, and GDP growth details. It can be seen that the U.S. PCE index has not shown significant increases in the past period, whether from the year-over-year PCE or the core PCE year-over-year growth rate, both remaining below 2.5. At the same time, the University of Michigan's expected inflation rate remains stable, and the unemployment rate has not shown significant increases. Additionally, non-farm payrolls in November showed growth compared to before, indicating that the job market also exhibits a strong side. Considering Trump's tax cuts later on, GDP growth also tends to stabilize, without showing significant declines in any specific area. Therefore, from the macro data perspective, there is no data to support the judgment of a resurgence in inflation or 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 Industrial Average has seen a record consecutive decline. Some friends believe this reflects the market's pessimism about the future prospects of U.S. industrial development. However, upon further investigation, it appears that the main reason for this impact is not systemic risk, but primarily due to a significant downward revision by UnitedHealth Insurance. First, the Dow Jones Industrial Average (DJIA) is a price-weighted index, meaning that the impact of each constituent stock on the index depends on its absolute stock price, not its market value. This means that stocks with higher prices will have higher weight in the Dow. As of November 2, 2024, UnitedHealth Insurance had the highest weight in the Dow at 8.88%, while in the latest individual stock weight, UNH's weight has dropped to 7.08%, with its stock price falling from 613 on December 4 to the current 500, a decline of 18%. Other high-weight stocks have not seen such a decline, so the drop in the Dow is primarily due to the single-point risk of the high-weight stock UNH, rather than systemic risk. So what happened to UNH? The main trigger was that UNH's CEO, Brian Thompson, was shot multiple times outside the Hilton Hotel in Manhattan on December 5, and died after being taken to the hospital. The shooter, Luigi Mangione, has a good social background. The interrogation process revealed that his actions stemmed more from exploitation of the American public by UNH in healthcare, which sparked widespread sympathy and ignited long-standing contradictions regarding the high cost of healthcare in the U.S., aligning with Trump's healthcare reform policy direction. Hence, the resonance between the two caused a significant stock price drop, which I will not elaborate on here.
Of course, regarding the small episode of the Bitcoin reserve, I believe Powell's attitude is actually not very important. As he himself said, the decision to advance this proposal rests with the members of Congress, not the Federal Reserve. Meanwhile, referring to the establishment and management framework of U.S. oil and gold reserves, the former is managed by the U.S. Department of Energy and the latter by the Treasury Department. Of course, the management process will involve collaboration with other departments, such as SEC, CFTC, and the impact of FED 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 the strong pressure exerted by Trump last Wednesday, who teamed up with Musk to attack the short-term spending bill in Congress, even threatening to abolish the debt ceiling rules, which triggered a risk-averse sentiment in the market.
Trump's overwhelming power threatens to permanently abolish the debt ceiling, casting a shadow over the traditional U.S. dollar credit system, prompting the market to begin risk-averse trading.
I wonder how many friends noticed the recent game of short-term spending in the U.S. Congress that took place last week. On Tuesday, December 17, House Speaker Mike Johnson had reached a short-term agreement with Democrats to extend government funding until March next year to avoid a government shutdown. Meanwhile, to ensure the passage of the bill, Johnson made some concessions to the Democrats and included several bipartisan-supported bills. However, on December 18, Musk began to fiercely criticize the proposal on X, claiming that it seriously infringed upon taxpayers' rights, leading to the swift rejection of the proposal.
Meanwhile, the entire process also received support from Trump, who claimed on True Social that Congress needed to abolish the absurd debt ceiling rules before Trump officially took office on January 20, as he believed these debt issues were caused by the Biden Democratic government and should be resolved by him. Subsequently, the Republican Party quickly revised the new spending bill, removing some compromise spending while adding proposals to abolish or suspend the debt ceiling. However, the proposal failed to pass in the House on Thursday (December 19), with 174 votes in favor and 235 against. This also raised the risk of a government shutdown, but ultimately, on December 20, the House passed a new temporary spending bill just hours before the deadline, which removed the proposed changes to the debt ceiling.
Although the new spending bill was passed, avoiding partial shutdowns of government departments, I believe the attitude expressed by Trump regarding the abolition of the debt ceiling has clearly raised market concerns. We know Trump has more power than any previous U.S. president, especially having absolute authority in the House. The new representatives will be sworn in and officially take office on January 3, significantly increasing the possibility of passing the abolition of the debt ceiling.
The U.S. debt ceiling refers to the maximum legal limit on borrowing by the U.S. federal government, 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 ceiling on what the government can legally borrow. Besides establishing fiscal discipline, the debt ceiling is also a crucial weapon in bipartisan negotiations, often used by the opposition party to attack the ruling party's spending bills, creating risks of government shutdowns to gain more bargaining chips.
Of course, the U.S. debt ceiling has been suspended numerous times, usually through legislative means, with Congress passing a bill to suspend the applicability of the debt ceiling. Suspending the debt ceiling means the government can continue borrowing without being subject to the established limit until the deadline specified in the bill or the debt reaches a new level. Some typical cases 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 implement some budget cuts. Additionally, to avoid government default, in October 2013, the U.S. Congress passed a bill that suspended the debt ceiling, allowing the government to borrow until February 2014. At that time, the U.S. debt level was already close to the limit, and suspending the debt ceiling avoided the risk of government default.
2017-2019: In 2017, the U.S. Congress 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 budgets and government spending. This suspension prevented the U.S. government from potentially defaulting.
2019-2021: In August 2019, the U.S. Congress passed a two-year budget agreement that not only raised the government's spending limit but also suspended the debt ceiling, allowing the government to borrow more money until July 31, 2021. This suspension enabled the government to continue borrowing without being restricted by the debt ceiling, ensuring the normal operation of the government and avoiding government shutdowns and debt defaults.
2021: In December 2021, to avoid a U.S. government default, Congress passed a temporary debt ceiling adjustment bill, 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 October 2021 deadline, avoiding the risk of default.
It can be seen that each suspension of the debt ceiling was to respond to certain special events, such as the financial crisis of 2008 and the pandemic of 2021. But why does the current proposal to abolish the debt ceiling have such an impact? The core issue lies in the current scale of U.S. debt. The ratio of U.S. public debt to GDP has now reached a historic high, exceeding 120%. If the debt ceiling is abolished at this time, it means that the U.S. will not be subject to any fiscal discipline for a long time in the future, which could have unpredictable effects on the U.S. dollar's credit system.
So why does Trump need to do this? The reason is quite simple: to get through the short-term risk of a debt crisis. We already know that in Trump's governance priorities, tax cuts and reducing public debt are the two most important goals. However, while tax cuts can boost economic vitality, they inevitably lead to a decrease in government revenue in the short term. The fiscal gap created may be compensated by increasing tariffs, but considering that manufacturing countries can respond by lowering exchange rates, this is why the dollar index has remained strong during the recent rate-cutting cycle. The core issue lies in countries preparing for a potential trade war. Meanwhile, the potential decline in domestic companies' earnings due to cuts in fiscal spending casts a shadow over economic growth. Therefore, to get through this painful period of policy implementation, Trump obviously hopes to solve this problem once and for all. Hence, abolishing the debt ceiling and relying on continued borrowing to get through the fiscal crisis seems very appropriate.
Finally, let's look at why this has affected cryptocurrencies. I think the core issue lies in the blow to the narrative of the Bitcoin reserve. We know that a significant part of the recent core narrative in cryptocurrency is that the U.S. is addressing the debt crisis through the establishment of a Bitcoin reserve. However, if Trump directly abolishes the debt ceiling rules, it indirectly undermines the value of that narrative. In previous analyses, we noted that the current cryptocurrency sector is at a stage of seeking new value support, which makes it understandable that profit-taking and risk-averse behavior have arisen. Therefore, I believe that in the coming period, observing the Trump team's governance will take precedence over other factors and requires continuous attention.