Analysis of the Reasons for the Pullback in the Crypto Assets Market: Trump’s Attitude Towards the Debt Ceiling Raises Concerns

Last week, the Crypto Assets market experienced a significant pullback. Although the market generally attributes this to the so-called "hawkish rate cut" remarks by Federal Reserve Chairman Powell, this might actually be a secondary factor. 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 caused by the threat to eliminate the debt ceiling rules, which ignited a risk-averse sentiment in the funds.

Powell's remarks are not the main reason for the market decline

Last Thursday morning's FOMC interest rate decision met market expectations, ending with a reduction of 25 basis points. The market attributed the decline in risk assets to two factors: first, the dot plot showed a lack of consensus among the committee members; second, the median target interest rate for 2025 was raised. However, from the perspective of changes in the U.S. Treasury yield curve, although long-term rates have risen, the impact on the 1-year yield has been minimal, indicating that the market has concerns about the long-term economic outlook, but risks are not expected to materialize in the short term.

From a macro data perspective, indicators such as the PCE index, non-farm employment, unemployment rate, and GDP growth have not shown any significant anomalies. This suggests that from a macro data standpoint, there is no evidence to support the judgment of a resurgence of inflation or an economic recession in the coming year. Therefore, Powell's concerns about inflation risks stem more from the uncertainties of Trump's policies rather than changes in certain macro indicators.

Trump threatens to cancel the debt ceiling, raising 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 uncertainty and risk aversion in the market. Although the new spending bill was ultimately passed, avoiding a partial government shutdown, Trump's expressed attitude towards abolishing the debt ceiling clearly raised concerns in the market.

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 long period in the future, and the impact on the dollar credit system is difficult to estimate.

Trump's proposal to abolish the debt ceiling may be aimed at implementing his tax reduction policy. While tax cuts can boost economic vitality, they will lead to a decrease in government revenue in the short term. To get through the painful period of policy implementation, abolishing the constraints of the debt ceiling and relying on continued borrowing to overcome the fiscal crisis seems appropriate in the short term.

Impact on the Crypto Assets Market

Trump's remarks on the debt ceiling have impacted Crypto Assets, primarily undermining the narrative that Bitcoin reserves could resolve the debt crisis. If Trump were to directly abolish the debt ceiling rules, it would indirectly weaken the value of that narrative, triggering profit-taking and risk aversion.

Therefore, in the coming period, observing the policies of the Trump team will become a focus, with its priority clearly higher than other factors, requiring continuous attention.