Author ｜ @Web3_Mario

Summary: Last week, the cryptocurrency market experienced a significant pullback, which was generally attributed to Federal Reserve Chairman Powell's so-called 'hawkish rate cut,' raising concerns in the risk markets about inflation and economic recession. However, according to my analysis, this may just be a secondary factor causing capital panic; the real impact stems from Trump's strong pressure on Congress regarding the short-term spending bill initiated with Musk last Wednesday, even threatening to eliminate the debt ceiling rules, which triggered uncertainty and ignited a risk aversion sentiment.

Powell may be caught in the crossfire; macro data is insufficient to trigger market panic over monetary policy risks.

The FOMC rate decision early last Thursday met market expectations, concluding with a 25BP reduction. The market generally attributed the decline in risk markets to two factors. First, the dot plot indicated that there was no consensus among the members, with Cleveland Fed President Harker leaning towards maintaining the current interest rates. 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, leading to a reduction in the expected rate cuts from four to two. Here, I would like to briefly introduce the so-called dot plot, which is 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, mainly used to observe the internal policy consensus of the Federal Reserve.



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 appeared to express concern about the inflation outlook for the coming year; secondly, regarding the establishment of Bitcoin reserves, Powell did not provide a positive response. However, after reading the full text, it felt that Powell's concerns about inflation risks did not stem from certain macro indicators' changes, but rather from the uncertainties related to Trump's policies. At the same time, his outlook on the future economic prospects also conveyed sufficient confidence.

Now let's take a look at why this is the case. First, let's examine the changes in the U.S. Treasury yield curve before and after the Fed's decision and related content. It can be seen that long-term rates are indeed rising, but the impact on the 1-year yield is not significant. This indicates that the market has indeed developed 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 actually reacted in advance to the expectations of the two upcoming rate cuts as early as November. Therefore, attributing the pullback mainly to the Fed's future rate decision risks seems insufficient. Additionally, it should be noted that the implied rates are calculated by subtracting the current futures price from 100.



Next, let's take a look at several macro data sets: the PCE index, non-farm employment, and unemployment rate, as well as GDP growth details. It can be seen that the U.S. PCE index has not shown any significant increase over the past period, whether in terms of year-on-year PCE or core PCE growth rate, both remaining below 2.5%. Meanwhile, the Michigan expectations inflation rate also remains stable, and the unemployment rate has not shown a significant increase. Additionally, the non-farm payroll in November has increased compared to previous months, indicating a strong aspect of the employment market. Considering Trump's tax cuts, the GDP growth has also stabilized without any significant declines in certain details. Therefore, from the perspective of macro data, there is no evidence to support predictions of renewed inflation or economic recession in the coming year. This indicates that Powell's concerns still stem from uncertainties regarding Trump's policy effects.



Here, I would like to explain one more point: the Dow Jones Industrial Average has set a record for consecutive declines. Some friends believe this reflects market pessimism about the future of U.S. industrial development. However, after some investigation, it appears that the main reason for this impact is not systemic risk but rather a significant downgrade from UnitedHealth Group. First, the Dow Jones Industrial Average (DJIA) is a price-weighted index, meaning that the price of each constituent stock affects the index based on its absolute value, not its market capitalization. This means that higher-priced stocks will carry more weight in the Dow. As of November 2, 2024, UnitedHealth holds the highest weight in the Dow at 8.88%. 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 drop of 18%. Other high-weight stocks have not seen such declines; therefore, 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, New York, on December 5, and died after being taken to the hospital. The shooter, Luigi Mangione, has a good social background, and the interrogation process revealed that his actions were largely driven by the exploitation of the American public by UNH in healthcare, which has sparked widespread sympathy in society and ignited long-standing contradictions over high healthcare costs in the U.S. This aligns with Trump's healthcare reform policy direction, thus causing a resonance that led to a sharp drop in stock prices; I won't elaborate further on this.



Of course, regarding the small episode of Bitcoin reserves, I believe Powell's attitude is not very important. As he himself said, the determination of whether to advance this proposal lies with 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, 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 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 Trump's strong pressure on Congress regarding the short-term spending bill initiated with Musk last Wednesday, even threatening to eliminate the debt ceiling rules, which triggered uncertainty and ignited a risk aversion sentiment.

Trump's overwhelming power threatens to permanently eliminate the debt ceiling, casting a shadow over the traditional dollar credit system, prompting the market to begin risk-averse trading.

I wonder how many friends noticed the recent struggle in the U.S. Congress over short-term spending. On Tuesday, December 17, House Speaker Mike Johnson had reached a short-term agreement with the Democrats regarding government spending, extending government funding until March of the following year to avoid a government shutdown. At the same time, to pass the bill, Johnson made some concessions to the Democrats, attaching several bills that received bipartisan support. However, on December 18, Musk began to criticize the proposal furiously on X, claiming that it severely infringed on taxpayers' rights, leading to the swift rejection of the proposal.



Meanwhile, the entire process also received Trump's support. Trump stated on True Social that Congress needs to abolish the absurd debt ceiling rules before January 20 when he officially takes office, as he believes these debt issues are caused by Biden's Democratic government and should be resolved by him. Subsequently, the Republican Party quickly revised the new spending bill, not only removing some compromise spending but also adding 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. Ultimately, on December 20, the House finally passed a new temporary spending bill with only a few hours remaining before the deadline, which removed the proposal to amend the debt ceiling.

Although the new spending bill was passed, avoiding a partial shutdown of government departments, I believe Trump's expressed attitude towards abolishing the debt ceiling clearly raised market concerns. We know that Trump wields more power than any previous U.S. president, especially holding absolute sway in the House. The new members of Congress will be sworn in and officially take office on January 3, and the likelihood of passing the abolition of the debt ceiling will significantly increase at that time. Therefore, let us analyze the resulting implications.

The U.S. debt ceiling refers to the maximum legal limit on the amount of money the 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 debt levels; rather, it represents the upper limit on what the government can legally borrow. Beyond establishing fiscal discipline, the debt ceiling is also a crucial weapon in the bipartisan struggle, often leading the opposition party to attack the ruling party's spending bills, triggering the risk of government shutdown to gain more negotiating leverage.

Of course, the U.S. debt ceiling has been suspended multiple times, usually through legislation passed by Congress to suspend the applicability of the debt ceiling. Suspending the debt ceiling means that the government can continue to borrow without being constrained by the set limit until the deadline specified in the legislation or until 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 a government default, in October 2013, the U.S. 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 nearing the ceiling, and suspending the debt ceiling avoided the risk of government default.

·2017-2019: In 2017, the U.S. Congress again passed a bill suspending 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 helped the U.S. government avoid a potential default.

·2019-2021: In August 2019, the U.S. Congress passed a two-year budget agreement that not only raised the 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 constrained by the debt ceiling, ensuring the government's normal operation and avoiding government shutdown and debt default.

·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 moment before the October 2021 deadline, avoiding the risk of debt default.

It can be seen that each suspension of the debt ceiling was to address certain special events, such as the financial crisis in 2008 and the pandemic in 2021. However, why does the proposal to abolish the debt ceiling at this time lead to 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 reached a historical high of over 120%. If the debt ceiling is abolished now, it means that the U.S. will be free from any fiscal discipline for a long time, and the impact on the dollar credit system is indeed unpredictable.



So why does Trump need to do this? The reason is simple: to navigate 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 stimulate economic vitality, they inevitably lead to a decrease in government revenue in the short term. Of course, any resulting fiscal gap could potentially be filled by increasing tariffs, but considering that manufacturing countries can respond by lowering their currency exchange rates, this is why the dollar index has remained strong during the recent interest rate cut cycle. The core issue is that countries are preparing for possible trade wars. Meanwhile, the potential decline in domestic companies' earnings caused by reduced fiscal spending also casts a shadow over the potential for economic growth. Therefore, to get through this painful policy implementation period, Trump naturally hopes to solve this problem once and for all, making it very appropriate to abolish the constraints of the debt ceiling and rely on continued borrowing to weather the fiscal crisis in the short term.



Finally, let's look at why this could impact cryptocurrencies. I think the core issue lies in the blow to the narrative of Bitcoin reserves. We know that establishing Bitcoin reserves to address the debt crisis has been a vital part of the recent cryptocurrency narrative. However, if Trump directly abolishes the debt ceiling rules, it effectively undermines the value of that narrative. In previous analyses, we've already indicated that the current cryptocurrency market is in the stage of seeking new value support, which makes it understandable that risk-averse profit-taking occurs. Therefore, I believe that in the upcoming period, observing Trump's team's governance priorities will clearly take precedence over other factors and will require continuous attention.