Crypto Assets Market Pullback Reasons Analysis

Last week, the Crypto Assets market experienced a significant pullback. While the market generally attributed this to Federal Reserve Chairman Powell's so-called "hawkish rate cut" remarks, it may actually be a secondary factor. The real impact came from Trump's strong pressure alongside Musk on the Congress's 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-off sentiment among investors.

Macroeconomic data does not support market panic

Last Thursday's early morning FOMC rate decision met market expectations, concluding with a reduction of 25 basis points. The market attributed the decline in risk assets to two factors: first, the dot plot indicated a lack of consensus among this round of members; second, the median target rate for 2025 was raised. However, a close analysis of Powell's speech suggests that his concerns about inflation risks seem to stem more from the uncertainties surrounding Trump's policies than from changes in certain macro indicators.

From the changes in the U.S. Treasury yield curve, it is evident that long-term rates have indeed risen, but there is little impact on the 1-year yield. This indicates that the market has concerns about the long-term economic outlook, but the risks are not expected to materialize in the short term. The prices of the 30-day federal funds futures contracts expiring in December 2025 show that the market had already reflected expectations for two future rate cuts as early as November.

Several important macroeconomic data sets, such as the PCE index, non-farm employment and unemployment rate, as well as GDP growth details, have not shown obvious signs of inflation reignition or economic recession. The PCE index remains below 2.5, the unemployment rate has not seen a significant increase, and the non-farm employment data for November showed growth. GDP growth is also stabilizing, with no significant decline observed in any particular detail.

Trump's Threat to Cancel Debt Ceiling Triggers Market Concerns

Last Wednesday, Trump teamed up with Musk to pressure Congress on the short-term spending bill and threatened to eliminate the debt ceiling rules, which triggered a strong market reaction. Although the new spending bill ultimately passed, averting a partial government shutdown, Trump's expressed stance on abolishing the debt ceiling clearly raised concerns in the market.

The U.S. debt ceiling refers to the maximum legal limit on the amount of money that the federal government can borrow. Its existence is intended to prevent excessive borrowing by the government and serves as an important tool in the bipartisan struggle. Currently, the ratio of U.S. public debt to GDP has reached a historic high of over 120%. If the debt ceiling were to be abolished at this time, it would mean that the U.S. would not be subject to any fiscal discipline for a long period in the future, which would make it difficult to estimate the impact on the dollar's credit system.

The purpose of Trump's actions may be to navigate the risks of a short-term debt crisis. Tax cuts and reducing public debt are his two main governance focuses, but tax cut policies will lead to a reduction in government revenue in the short term. To overcome the pain period of policy implementation, it seems appropriate to abolish the debt ceiling constraints and rely on continued borrowing to get through the fiscal crisis in the short term.

Impact on Crypto Assets Market

Trump's threat to abolish the debt ceiling has impacted the Crypto Assets market, primarily undermining the narrative that Bitcoin reserves could solve the U.S. debt crisis. If Trump directly abolishes the debt ceiling rules, it would indirectly weaken the value of that narrative. Currently, Crypto Assets are in a phase of searching for new value support, so the news has understandably triggered profit-taking and risk aversion.

Therefore, in the coming period, the priority of observing the Trump team's governance is clearly higher than other factors, and continuous attention is needed.