Here is the English translation of the text, with the specified terms preserved:
Author: @Web3_Mario
Abstract: Last week, the cryptocurrency market experienced a significant pullback, which was generally attributed to the so-called "hawkish rate cut" by Federal Reserve Chairman Powell, triggering concerns in the risk market about inflation and economic recession. However, according to the author's analysis, this is probably just a secondary factor in triggering the capital panic. The real impact lies in the uncertainty caused by Trump's strong pressure on Congress's short-term spending bill, jointly launched with Musk last Wednesday, and even the threat to cancel the debt ceiling rule, which triggered a risk-averse sentiment among investors.
Powell may have been caught in the crossfire, and macroeconomic data is not enough to trigger market panic over monetary policy risks
The FOMC interest rate decision on Thursday morning last week was in line with market expectations, ending with a 25BP reduction. The market generally attributed the decline in the risk market to two aspects: first, the dot plot showed that there was no unanimous consensus among the members this time, with Cleveland Fed President Harker inclined to keep the interest rate unchanged. Additionally, the median of the 25-year target interest rate was raised to 3.75%-4.00%, compared to 3.25%-3.5% in the September dot plot, with the rate cut expectation reduced from 4 times to 2 times.
In addition, during the subsequent Q&A session, Powell's remarks were interpreted by the market as hawkish guidance, mainly including two aspects: first, he seemed to express concerns about the inflation outlook for the coming year, and second, regarding the establishment of a BITCOIN reserve, Powell did not give a positive response. However, after reading the full text, it seems that Powell's concerns about inflation risks are not derived from changes in certain macroeconomic indicators, but more from the uncertainty of Trump's policies. At the same time, he also expressed sufficient confidence in the future economic outlook.
Let's take a look at why this is the case. First, let's look at the changes in the US Treasury yield curve before and after the release of the Fed's decision and related content. We can see that the long-end rates have indeed risen, but the impact on the 1-year yield is not very large, indicating that the market has indeed expressed more concerns about the long-term economic outlook, but the risks are not expected to materialize in the short term.
From the price of the December 25 30-day federal funds futures contract, we can see that the market has already priced in the prospect of two rate cuts as early as November, so attributing the pullback mainly to the risk of future Fed rate decisions seems to be an insufficient argument.
Next, let's look at several sets of macroeconomic data, including the PCE index, non-farm employment and unemployment rate, as well as GDP growth components. We can see that the US PCE index has not shown a clear upward trend in the past period, with both the year-on-year PCE and core PCE growth rates remaining below 2.5. The Michigan inflation expectation has also remained stable, and the unemployment rate has not shown a significant increase. The November non-farm employment also showed growth compared to the previous period, indicating a strong job market. Considering the subsequent tax cuts by Trump, the GDP growth has also remained stable without a clear decline in any component. Therefore, from the perspective of macroeconomic data, there is no data to support the judgment of a resurgence of inflation or an economic recession in the coming year. This also indicates that Powell's concerns are more about the uncertain effects of Trump's policies.
Here, I'll briefly explain another point. The Dow Jones index has recorded consecutive declines, and some friends believe this reflects the market's pessimism about the future development prospects of US industry. However, after further investigation, the main reason for this impact does not seem to be systemic risk, but rather the sharp downward revision by UnitedHealth. First, the Dow Jones Industrial Average (DJIA) is a price-weighted index, meaning that the absolute price of each constituent stock determines its influence on the index, rather than its market capitalization. This means that higher-priced stocks will have a higher weighting in the Dow, and as of November 2, 2024, UnitedHealth had the highest weighting in the Dow at 8.88%. However, in the latest individual stock weighting, UNH's weighting has dropped to 7.08%, with the stock price falling from $613 on December 4 to the current $500, a drop of 18%. The other high-weight stocks have not seen such a sharp decline, so the Dow's decline is mainly due to the single-point risk of the high-weight stock UNH, rather than systemic risk.
Of course, regarding the small episode about the BITCOIN reserve, the author believes that Powell's attitude is not really important. As he himself said, the decision to push forward this proposal lies with the House of Representatives, not the Fed. At the same time, referring to the establishment and management framework of the 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 the collaboration of other departments, such as the SEC, CFTC, and the policy influence of the FED. However, in this process, these departments play more of a collaborative role.
So why did the market react so violently? The author believes the main reason is the uncertainty caused by Trump's strong pressure on Congress's short-term spending bill, jointly launched with Musk last Wednesday, and even the threat to cancel the debt ceiling rule, which triggered a risk-averse sentiment among investors.
Trump's threat to permanently cancel the debt ceiling casts a shadow over the traditional US dollar credit system, and the market has begun to engage in risk-averse trading
I don't know how many of you have followed the recent debate in the US Congress over short-term spending. Last Tuesday, December 17, House Speaker Mike Johnson and the Democrats reached a short-term agreement on government spending, extending government funding until next March to avoid a government shutdown. At the same time, to pass the bill, Johnson made some concessions to the Democrats and attached several bills supported by both parties. However, on December 18, Musk began to attack the proposal furiously on X, believing that the proposal seriously infringed on the rights of taxpayers, leading to the rapid rejection of the proposal.
Here is the English translation of the text, with the specified terms preserved:
At the same time, the entire process also received the support of Trump. Trump stated on True Social that Congress needs to repeal the absurd debt ceiling rule before January 20th, the day Trump officially takes office, as he believes 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, not only removing some compromising spending, but also adding proposals to repeal or suspend the debt ceiling. However, this proposal failed to pass the House of Representatives on Thursday (December 19th) with 174 votes in favor and 235 votes against. This also raised the risk of a government shutdown, but eventually, on December 20th, the House of Representatives finally passed a new temporary spending bill, just a few hours before the deadline, with the proposal to modify the debt ceiling removed.
Although the new spending bill was passed, avoiding a partial government shutdown, the author believes that Trump's expressed attitude towards the repeal of the debt ceiling has clearly caused market concerns. We know that Trump's power is the greatest among all U.S. presidents, especially with an absolute voice in the House of Representatives, and the new House members will be sworn in and officially take office on January 3rd, at which time the possibility of passing the repeal of the debt ceiling will be greatly increased. Therefore, let's analyze the impact of this.
The U.S. debt ceiling (Debt Ceiling) is the maximum legal borrowing limit set by Congress for the federal government, first established in 1917. This limit is set by Congress to limit the growth of government debt. The purpose of the debt ceiling is to prevent the government from over-borrowing, but it is not an effective means of controlling the debt level, but rather the legal limit for the government to borrow. In addition to establishing fiscal discipline, the debt ceiling is also an important weapon in the game between the two parties, 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 U.S. debt ceiling has been suspended several times, usually through legislation, where Congress passes a bill to suspend the application of the debt ceiling. Suspending the debt ceiling means that the government can continue to borrow without being limited by the set ceiling, 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 the time, Congress and President Obama engaged in intense negotiations on how to raise the debt ceiling, eventually reaching an agreement to temporarily raise the debt ceiling and adopt some budget-cutting measures. In addition, to avoid government default, in October 2013, the U.S. Congress passed a bill to suspend the debt ceiling and allow the government to borrow until February 2014. At the time, the U.S. debt level was already close to the ceiling, and the suspension of the debt ceiling avoided the risk of government default.
- 2017-2019: In 2017, the U.S. 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 budget and government spending agreements. This suspension allowed the U.S. government to avoid a possible default.
- 2019-2021: In August 2019, the U.S. Congress passed the "Two-Year Budget Agreement," which not only increased 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 being constrained by the debt ceiling, ensuring the normal operation of the government and avoiding government shutdowns and debt defaults.
- 2021: In December 2021, to avoid the U.S. government defaulting, 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 expiration in October 2021, avoiding the risk of debt default.
As can be seen, each suspension of the debt ceiling was to address certain special events, such as the 2008 financial crisis and the 2021 pandemic. But why would the current proposal to abolish the debt ceiling have such an impact? The core lies in the current debt scale of the United States. Currently, the ratio of U.S. 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 United States will not be subject to any fiscal discipline constraints for a relatively long period of time in the future, and the impact on the U.S. dollar credit system is actually incalculable.
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 the most important goals in Trump's governance priorities. However, while the tax cut policy can boost economic vitality, it will inevitably lead to a short-term reduction in government revenue. Of course, the resulting fiscal deficit may be offset by increasing tariffs, but considering that manufacturing countries can respond by lowering exchange rates, this is why the U.S. dollar index has remained strong even in the recent easing cycle, the core of which is that countries are preparing for possible trade wars. At the same time, the potential decline in the earnings of domestic-oriented companies caused by cuts in fiscal spending has also cast a shadow over the potential for economic growth. Therefore, in order to get through this period of policy implementation pain, Trump naturally hopes to solve this problem once and for all, so the abolition of the debt ceiling shackles, relying on continued borrowing to get through the fiscal crisis in the short term, seems very appropriate.
Finally, let's look at why this will impact cryptocurrencies. I think the core is the blow to the narrative of Bitcoin reserves. We know that in the recent core narrative of cryptocurrencies, the U.S. solving the debt crisis through the establishment of Bitcoin reserves is a relatively important part, but if Trump directly abolishes the debt ceiling rule, it is equivalent to indirectly undermining the value of this narrative. In the previous analysis, we have found that cryptocurrencies are currently in the stage of seeking new value support, and the locking of profit-taking and risk aversion triggered by this is also understandable. Therefore, I believe that in the coming period, the priority of observing the governance of the Trump team is clearly higher than other factors, and we need to continue to pay attention.
