Article reprinted from: Mario Looks at Web3
Author: @Web3_Mario
Summary: Last week, the cryptocurrency market experienced significant pullbacks, which the market generally attributed to Fed Chairman Powell's so-called 'hawkish rate cut,' triggering concerns in the risk market about inflation and economic recession. However, according to my analysis, this may only be a secondary factor causing capital panic. The real impact lies in the strong pressure from Trump on Congress regarding the short-term spending bill initiated with Musk last Wednesday, even threatening to abolish the debt ceiling rule, which triggered risk aversion in capital.
Powell is likely to be caught in the crossfire; macro data is not enough to trigger panic in the market about monetary policy risks.
Last Thursday's FOMC interest rate decision met market expectations, closing with a 25BP reduction. The market generally attributed the decline in risk markets to two factors: first, the dot plot showed that there was no unified consensus among the committee members, with Cleveland Fed President Mester leaning towards maintaining interest rates unchanged. Additionally, the median target interest rate for 2025 was raised to 3.75% to 4.00%, compared to the previous median target interest rate in September of 3.25% to 3.5%, reducing the expectation of rate cuts from four times to two times. Here, I would like to briefly introduce the so-called dot plot, which is a charting 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, usually published four times a year, primarily used to observe the policy consensus within the Fed.
In addition, during the subsequent Q&A session, some of Powell's statements 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, he did not give a positive response to the establishment of Bitcoin reserves. However, after reading the full text, it feels that Powell's concerns about inflation risks do not stem from changes in certain macro indicators but more from the uncertainty associated with Trump's policies. At the same time, his outlook on future economic prospects also reveals 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 Fed's decision and related content was made public. It can be seen that long-term rates have indeed risen, but the impact on the 1-year yield is not significant, indicating that the market indeed has more concerns about the long-term economic outlook, but 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 had already reacted in advance to the prospects of two rate cuts as early as November, so attributing the pullback mainly to the future interest rate decision risks of the Fed seems insufficiently justified. Here, I would like to add that the implied rate is calculated by subtracting the current futures price from 100.
Next, let's look at several macro data points, including 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 at least over the past period, whether from the year-on-year PCE or the core PCE year-on-year growth rate, both remain below 2.5. Meanwhile, 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 for November have also shown growth compared to before, indicating that the job market is also showing a strong side. Considering Trump's tax cuts later on, GDP growth has also stabilized without showing significant declines in any specific area. Therefore, from a 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 another point: the Dow Jones Index has experienced record consecutive declines. Some friends believe this reflects market pessimism about the future industrial development prospects of the U.S. However, upon further investigation, the main reason for this impact does not seem to be systematic risk, but rather comes from the significant downgrade of UnitedHealth's outlook. First, the Dow Jones Industrial Average (DJIA) is a price-weighted index, meaning that the price of each component stock affects the index based on its absolute value rather than market capitalization. This means that stocks with higher prices will have more weight in the Dow. As of November 2, 2024, UnitedHealth represents the highest weight in the Dow at 8.88%. However, in the latest individual stock weightings, 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 drop. Therefore, the decline in the Dow is primarily due to the single-point risk of the high-weight stock UNH, rather than systematic risk. So what happened to UNH? The main trigger is 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. The interrogation process showed that his actions stemmed more from the exploitation of the American public by UNH in terms of healthcare, which has elicited widespread sympathy for UNH and triggered a long-standing conflict over expensive healthcare costs in the U.S. This also aligns with Trump's healthcare reform policy direction, thus creating a resonance that led to a sharp decline in stock prices, which I won't elaborate on here.
Of course, regarding the Bitcoin reserves interlude, I believe Powell's attitude is not particularly important. As he himself said, the decision to advance this proposal lies with Congress, not the Fed. In the meantime, referencing the establishment and management framework of U.S. 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 involves collaboration with other departments, such as the SEC, CFTC, etc., as well as the policy impact of the Fed. However, in this process, these departments play more of a collaborative role.
So why did the market react so violently? The main reason, in my opinion, is Trump's strong pressure on Congress regarding the short-term spending bill initiated with Musk last Wednesday, even threatening to abolish the debt ceiling rule, which has created uncertainty and triggered a 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 begin risk-averse trading.
I wonder how many of my friends noticed the power struggle in the U.S. Congress regarding short-term spending last week. On Tuesday, December 17, House Speaker Mike Johnson had reached a short-term agreement with the Democrats to extend government funding until March next year to avoid a government shutdown. At the same time, 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 vehemently criticize the proposal on X, arguing that it severely infringed on taxpayers' rights, leading to the proposal's rapid rejection.
At the same time, the entire process also received Trump's support, as he claimed on Truth Social that Congress needs to abolish the absurd debt ceiling rule before he officially takes office on January 20, as he believes these debt issues are caused by the Biden Democratic government and should be resolved by him. Subsequently, the Republican Party quickly revised the new spending bill, not only deleting some compromise 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, raising the risk of a government shutdown. Of course, ultimately, on December 20, the House 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 was passed, avoiding some shutdowns in government departments, I believe that Trump's expressed attitude toward abolishing the debt ceiling has clearly raised concerns in the market. We know that Trump has the most power among U.S. presidents in history, especially as he holds absolute discourse power in the House of Representatives. The new congressmen will be sworn in and officially take office on January 3, significantly raising the possibility of passing the proposal to abolish the debt ceiling. Therefore, let's analyze the impact this may bring.
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 existence of the debt ceiling aims to prevent excessive government borrowing, but it is not an effective means of controlling debt levels; rather, it is the upper limit of what the government can legally borrow. In addition to establishing fiscal discipline, the debt ceiling is also an important weapon in the bipartisan struggle; often, the opposition party will attack the ruling party's spending bills, leading to government shutdown risks to gain more negotiating leverage.
The U.S. 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 borrowing without being subject to the established limits until the deadline specified by the bill or until the debt reaches a new level. Typical cases include the following:
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. In addition, to avoid government default, in October 2013, Congress passed a bill suspending the debt ceiling, allowing 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 passed another 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 allowed the U.S. government to avoid potential default.
2019 - 2021: In August 2019, Congress passed a two-year budget agreement, which not only increased 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 bound 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 adjustment bill for the debt ceiling, raising the 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.
It can be seen that each suspension of the debt ceiling is to respond to certain special events, such as the financial crisis of 2008 and the pandemic of 2021. But why does the reintroduction of abolishing the debt ceiling have such an impact now? The core issue is the current scale of U.S. debt. Currently, the ratio of U.S. public debt to GDP has reached a historical high, exceeding 120%. If the debt ceiling is abolished at this time, it means that the U.S. will not be bound by any fiscal discipline for a relatively long period in the future, which could have unpredictable effects on the dollar's credit system.
So why does Trump need to do this? The reason is simple: to navigate the short-term debt crisis risks. We already know that in Trump's governance focus, tax cuts and reducing public debt are two of the most important goals. However, while tax cut policies can stimulate economic vitality, they inevitably lead to a decrease in government revenue in the short term. The resulting fiscal gap may be compensated by increasing tariffs, but considering that manufacturing countries can respond by lowering exchange rates, this explains why the dollar index has remained strong during the recent rate-cutting cycle. The key issue lies in various countries' preparations against potential trade wars. Moreover, the potential decline in domestic enterprises' earnings due to reduced fiscal spending casts a shadow over economic growth potential. Therefore, to navigate the pain period of policy implementation, Trump certainly hopes to resolve this issue once and for all. Thus, abolishing the shackles of the debt ceiling and temporarily relying on continued borrowing to navigate the fiscal crisis becomes very appropriate.
Finally, let's look at why this affects cryptocurrencies. I believe the core issue lies in the impact on the narrative surrounding Bitcoin reserves. We know that in the recent core narrative of cryptocurrencies, the U.S. establishing Bitcoin reserves to address the debt crisis is a significant element. However, if Trump directly abolishes the debt ceiling rule, it indirectly undermines the value of that narrative. In previous analyses, we have noted that the current cryptocurrency market is in a stage of seeking new value support, making it easy to understand that profit-taking and risk aversion have been triggered. Therefore, I believe that observing the Trump team's policies in the upcoming period will be clearly prioritized over other factors and should be monitored continuously.
