Bitcoin Recedes to $27K as Fed's Mester Favors Unabated Tightening

Bitcoin (BTC) ran into selling pressure early Wednesday after a top Federal Reserve (Fed) official said there is no compelling case to halt the liquidity tightening. The Fed's unrelenting tightening has roiled risk assets, including cryptocurrencies.

"I don't really see a compelling reason to pause," Federal Reserve Bank of Cleveland President Loretta Mester told FT in an interview published on Wednesday. "I would see more of a compelling case for bringing the rates up and then holding for a while until you get less uncertain about where the economy is going," Mester added.

The weak China data released early Wednesday likely added to bearish pressures around bitcoin and other risk assets. China's official manufacturing purchasing managers' index for may came in at 48.8 against a forecast of 49.4, signaling signaling a faster-than-expected contraction in the manufacturing activity in the world's second-largest economy.

Bitcoin, a pure play on the dollar liquidity, fell by nearly 2% to $27,021 after Mester's comments were published, CoinDesk data shows.

Futures tied to Wall Street's tech-heavy index Nasdaq fell by 0.38%, hinting at a negative open on Wednesday. The dollar index, which tracks the greenback's value against major fiat currencies, rose 0.27% to 104.40. Gold remained resilient, trading 0.2% higher at $1,962 per ounce.

The Fed has raised rates by 500 basis points to 5% since March 2022 to tame inflation. Mester's support for another rate hike and the higher-for-longer stance comes on the heels of hotter-than-expected inflation data and validates the recent hawkish repricing of interest rate expectations in the U.S.

Official data released last Friday showed the consumer spending in the U.S. increased more than expected in April even as the Fed's preferred inflation measure, the core PCE rose to 4.4% on a yearly basis in April from 4.2% in March. Per the Fed funds futures, traders no longer expect the Fed to cut rates this year and have fully priced in a 25 basis point rate hike for June.

Over the past seven months, traders consistently hoped that the Fed would pause its rate hikes in the first half of 2023 and resort to liquidity-boosting rate cuts in the second half. That's one of the significant reasons behind bitcoin's year-to-date gain of over 65%. The cryptocurrency clocked a 10-month high of $31,000 in April. The dollar index dropped by over 12% in the seven months to April.

Mester added that the debt ceiling deal removes a "big piece of uncertainty" from the U.S. economy.

Over the weekend, U.S. President Joe Biden and the House Speaker, Kevin McCarthy, reached a tentative deal to suspend the $31.4 trillion and avoid a default. The lawmakers now need to push the deal through the House and the Senate to avoid a default.

Analysts told CoinDesk that once the deal is approved, the Treasury would begin refilling its coffers by issuing bonds and, in the process, sucking out the dollar liquidity from the system. That would be bearish for risk assets, in general.

UPDATE (May 31, 2023, 10:39 UTC): Adds weak China data as possible catalyst for the price drop in the third para.