US Debt Ceiling Talks and Hawkish Fed Remarks Quashed Crypto Gains in May

The bipartisan bill looking to suspend the US government’s standing $31.4 trillion debt ceiling and avert a catastrophic default before June 5 earlier on Wednesday passed the first hurdle in the House of Representatives.

The agreement struck on Sunday after talks between the White House and Republican negotiators proposes suspending the US debt ceiling through 2025. Following the first green light, the bill is now headed to a House vote where Republicans hold a narrow majority. While the deal has drawn criticism from some legislators, House Speaker Kevin McCarthy is confident in the bill passing after the procedural vote. Still, there is an air of uncertainty surrounding the deal, particularly whether it will pass the bigger test. Markedly, the resulting disquietude has pushed the majority of market participants to retreat to the sidelines awaiting the outturn of the vote.

Interest-rate setting decision makes investors jittery

The debt ceiling drama in Washington isn’t the only macro development that has been in play in the markets this week or month. The status of the US economy has also been of major interest to investors whose eyes are presently locked on the upcoming Federal Reserve June meeting. Speaking during an event on Wednesday, Philadelphia Fed President Patrick Harker said the US central bank should consider skipping an interest- rate hike in the June 13-14 policy meeting.

The remarks from Harker, a voting member on the FOMC this year, came on the same day the Federal Reserve published a report indicating that the economy has slowed in recent weeks while job growth has decelerated. Worth noting, some of the recent economic data releases have suggested an overall performance exceeding expectations resulting in shouts for keeping interest rates steady.

The argument for a halt in rate hikes is also founded on the notion that the impact of monetary policies is subtle and prevailing in the sense that previous rate hikes have yet to be fully absorbed by the economy.

US inflation rate history

Some Fed policymakers have still expressed views advocating for a cautious approach. In a Tuesday interview with Financial Times, Cleveland Fed President Loretta Mester said she sees no compelling reason for the Fed to pause on rate rises especially if economic data shows more must be done to tame inflation.

“I don’t really necessarily see a compelling reason that we wouldn’t want to take another small step [at this point] to counter some of that really embedded, stubborn inflationary pressure,” Mester, who is currently not a voting member of the policy-setting FOMC, said. “I would see more of a compelling case for bringing [rates] up. . . and then holding for a while until you get less uncertain about where the economy is going.”

Fed policymakers previously adjusted the benchmark short-term interest rate upwards for a tenth straight time, taking it to a range of 5.00%-5.25% in an early-May meeting. The nearing June meeting will come after the incoming employment data due on Friday and a fresh read on the next inflation report. The monthly jobs report has traditionally been viewed as an influencing point in policy decisions.

Target rate probabilities. Source: CME FedWatch Tool

Federal Reserve officials leaning towards halting rate hikes include nominated vice-chair Philip Jefferson, Susan Collins and Michelle Bowman. Jefferson noted at a Fed conference on Wednesday that refraining from a rate hike in the upcoming meeting will allow the committee to make a more informed decision based on gathered data.

“Skipping a rate hike at a coming meeting would allow the committee to see more data before making decisions about the extent of additional policy firming.”

Market analysts and other industry executives have wagered on the Central Bank to abstain from an upward interest rates adjustment. The CME FedWatch tool shows a 62.2% probability for keeping the target unchanged and 37.8% for a 25 bps increase.

Bitcoin closes first red month this year as Ether’s deflationary supply hands token price boost

Bitcoin and the majority of altcoins appeared to have bounced back this week after dropping to multi-week lows towards the end of last week. The market rebounded impressively coming off the weekend, with Bitcoin recovering almost all of its losses. Monday delivered even more price gains as markets reacted to a tentative deal by US President and House Speaker McCarthy to raise the debt ceiling. Crypto markets turned red on Tuesday before staying grounded for the better part of Wednesday.

The latest slump suggests traders are concerned over the lack of consensus on managing the current fiscal situation in the US regarding the debt ceiling and its potential effect on the markets. There is also a renewed belief that the Federal Reserve will remain hawkish even though some central bankers are split on whether to stay on the path of hikes. These factors have not gone down well with the leading digital asset. Leading the crypto market, Bitcoin posted further declines on Wednesday cementing projections of a red monthly close for the majority of them. The BTC/USD pair was spotted at $27,100 at the time of writing.

Bitcoin monthly candles. Source: TradingView

Meanwhile, Ether has shown resilience above $1,850 mark with Coinglass data indicating it is set for a relatively flat close. Ether market’s upbeat sentiment is supported by its supply deflationary aspect.

Ethereum monthly candles

Data from ultrasound.money shows nearly 200,000 tokens have been burnt in the last 30 days against an issuance supply of just over 57,000 tokens. The figures translate to a negative supply growth of 1.42% per year which reinforces the deflationary narrative.

BTC/USD vs ETH/USD price chart

The latest display of Ethereum price carving its own course while outperforming Bitcoin on account of their different supply-demand economics indicates diverging correlation between the assets which could grow into a long-term trend. Worth noting, roughly 18% of Ether supply is currently staked to the Beacon Chain address per Dune Analytics ETH staking dashboard.

To learn more about Bitcoin or Ethereum, check out our Investing in Bitcoin and Investing in Ethereum guides.

KAVA, XRP and RNDR among best performers in May

Other top altcoins like Avalanche (AVAX), Polygon (MATIC) and Solana (SOL) are on course to print bigger losses for the month of May, having given up 16.95%, 8.85%, and 7% respectively in the last 30 days. Dogecoin (DOGE) and BNB (BNB) have shed significant value as well, down 9.30% and 10% during this period.

Top gainers in May include Kava (KAVA), Render (RNDR), Tron (TRX) and Ripple (XRP) which have charted notable rallies across the month despite the general lackluster performance. Kava stands out as the best performer in May with 34.17% gains during this period fueled by news of a mainnet upgrade meant to bring improvements in the blockchain’s security and throughput.

Top altcoin performers in May

Meanwhile, the ascent in XRP price above $0.50 has been attributed to the positive developments in the lawsuit filed by the US Securities and Exchange Commission against Ripple, the blockchain and fintech company behind the project. Ripple executives and backers are mostly confident in a ruling coming soon with their sanguine remarks suggesting one that favors the crypto project. CEO Brad Garlinghouse earlier this month said the court’s decision could be on the way as early June.

Tron has also recorded double-digit gains while seeing an increase in popularity due to the token’s utilization in market-making on trading platforms. Tron network is the top blockchain platform for Tether’s USDT stablecoin issuance holding $40 billion worth of USDT compared to $10 billion USDT supply on Ethereum. Its low transaction fees have especially made it an attractive option for market participants. Render (RNDR) has also been a top performer in May, with its 16.35% rally across May coming on the back of increased demand for graphics cards to support AI.

To learn more about these tokens, check out our Investing in Kava and Investing in Render guides.