Behind the Fluctuation of the Crypto Market: Trump's Debt Ceiling Comments Trigger Risk Aversion Sentiment

Last week, the crypto market experienced a significant pullback. On the surface, the market attributed this to the so-called "hawkish rate cut" remarks by Federal Reserve Chairman Powell, which raised concerns about inflation and economic recession. However, a deeper analysis reveals that this may only be a secondary factor triggering capital panic. The real impact came from Trump and Musk's strong pressure on Congress regarding the short-term spending bill last Wednesday, as well as the uncertainty triggered by the threat to eliminate the debt ceiling rules, which ignited a risk-averse sentiment in funding.

Powell's remarks have limited impact, macro data does not support concerns over monetary policy risks

The FOMC interest rate decision early last Thursday met market expectations, concluding with a reduction of 25 basis points. The decline in risk assets is generally attributed to two factors: first, the dot plot shows a lack of consensus among the members, with some leaning towards keeping interest rates unchanged. Second, the median target interest rate for 2025 was raised to 3.75%-4.00%, compared to the 3.25%-3.5% in the September dot plot, with the expectation of rate cuts revised from 4 times to 2 times.

However, a careful analysis of the changes in the U.S. Treasury yield curve reveals that while long-term rates have risen, they have little impact on the 1-year yield. This indicates that the market has concerns about the future economic outlook, but the risks in the short term are not apparent. In fact, the market's expectations for two future rate cuts had already been reflected as early as November. Therefore, attributing the pullback primarily to the risks of the Federal Reserve's future rate decisions seems to lack sufficient basis.

From a macro data perspective, the PCE index, non-farm employment and unemployment rate, as well as GDP growth details have not shown any obvious abnormalities. The PCE index remains below 2.5, the unemployment rate is stable, non-farm employment is growing, and GDP growth is tending to stabilize. These data do not support the judgment of a re-ignition of inflation or an economic recession in the coming year. Therefore, Powell's concerns are likely to stem from the uncertainties of Trump's policies rather than changes in the economic fundamentals.

Trump threatens to cancel the debt ceiling, casting a shadow over the dollar's credit system

Last week, the U.S. Congress engaged in intense negotiations over a short-term spending bill. On December 17, the Speaker of the House reached a short-term agreement with the Democrats on government spending to avoid a government shutdown. However, on the 18th, Musk criticized the proposal on social media for infringing on taxpayers' rights, leading to the proposal being swiftly rejected.

Trump subsequently expressed his support, stating that Congress needed to abolish the "absurd" debt ceiling rule before he officially took office. The Republicans then amended the spending bill, removing some compromise expenditures, and supplemented it with a proposal to abolish or suspend the debt ceiling. This amendment was not passed in the House of Representatives, raising the risk of a government shutdown. Ultimately, on the 20th, the House passed a new temporary spending bill, removing the modifications to the debt ceiling.

Although the new spending bill has been passed, avoiding a partial government shutdown, Trump's expressed attitude towards abolishing the debt ceiling has raised concerns in the market. Considering Trump's influence within the Republican Party and the imminent assumption of office by new members of Congress, the possibility of abolishing the debt ceiling has significantly increased.

The U.S. debt ceiling is the maximum legal borrowing limit for the federal government, aimed at restricting the growth of government debt. It is also an important bargaining chip in the bipartisan game. Although the U.S. has suspended the debt ceiling multiple times, the current debt level has reached a historic high, with public debt exceeding 120% of GDP. Abolishing the debt ceiling at this time means that the U.S. will be long unrestrained by fiscal discipline, and the impact on the dollar's credit system is difficult to estimate.

Trump's move is likely aimed at addressing the short-term fiscal pressure that may arise from tax cuts. However, it also indirectly undermines the narrative of Bitcoin as a reserve asset to solve the U.S. debt problem, triggering risk aversion in the crypto market.

In the coming period, observing the policies of the Trump team will be one of the important factors affecting the market, and it requires continuous attention.