The US Economic Recession Is Imminent, What Impact Will It Have On The Crypto Market?

[TL；DR]:

The Trump administration tried to ease the interest pressure on $36.2 trillion in national debt through tariff wars, fiscal spending cuts and pressure on the Federal Reserve to cut interest rates, but policy uncertainty pushed up inflation expectations, causing U.S. stocks and crypto markets to fall simultaneously.

The Federal Reserve is wavering between “fighting inflation” and “maintaining growth.” The market expects that interest rate cuts will lag behind the pace of economic deterioration, and institutional funds are accelerating their withdrawal from the crypto market.

The price of BTC fell below key support due to the drag of U.S. stocks, but historical seasonal patterns (the “golden window period” in April and October) may drive a temporary rebound.

Introduction

The U.S. economy is sending multiple recession signals. As various economic data reinforce this expectation, the U.S. stock market and the crypto market have recently fallen into violent fluctuations. In particular, BTC has fallen 20% from the high of $100,000 when President Trump won the election, reflecting the market’s deep concerns about the U.S. economic recession and the fragility of the crypto market. This article will analyze the transmission path and potential impact of the U.S. economic recession on the crypto market from macroeconomic policies, market linkage mechanisms, and investor behavior.

Trump’s New Policy Impacts Economic Data Deteriorating

Since March, the market has been increasingly expecting that the US economy is sliding towards the brink of recession. The radical policies introduced by the Trump administration after taking office, including the imposition of 10%-25% tariffs on major trading partners, the layoffs of 172,000 federal employees by the Department of Government Efficiency (DOGE) led by Musk, and the pressure on the Federal Reserve to cut interest rates, undoubtedly indicate that its policy focus has shifted to long-term structural adjustments rather than short-term market stability.

Source: Polymarket

This initiative to cool down the economy through tariff wars, government spending cuts (such as the DOGE layoff plan) and energy price intervention has the core goal of alleviating the interest pressure on the $36.2 trillion in national debt by lowering interest rates. According to the US Congressional Budget Office (CBO), if interest rates remain at current levels, interest payments will reach $950 billion in fiscal year 2025, accounting for 19% of fiscal revenue; if interest rates are cut by 100 basis points, $400 billion in interest payments can be saved each year.

Even more serious is that Trump’s second term plans to reduce the corporate income tax rate from 21% to 15% and make the tax cut policy permanent, which is expected to increase the deficit by $4.1 trillion over the next decade. This “debt-to-debt” model has exacerbated market concerns about debt sustainability.

In addition, large-scale layoffs have further exacerbated economic pressure. Musk’s “Government Efficiency Department” laid off 172,000 federal employees in February, and the total number may exceed 100,000 in the future. Although this move is intended to reduce the deficit of $7.8 trillion in fiscal spending (revenue in fiscal year 2024 is only $5 trillion), it will weaken consumer spending power in the short term.

Reflecting on economic data, market pessimism about the inflation outlook still soared in March, as tariff changes have not yet been reflected in inflation data. One-year inflation expectations jumped to 4.9% from 4.3% last month, while long-term inflation expectations tracking expectations for the next 5 to 10 years also rose from 3.4% in February to 3.9% in March, marking the highest level of long-term inflation expectations since 1991.

Source: finance.yahoo

Although last week’s US CPI data was slightly lower than expected, temporarily easing market tensions, the Fed is unlikely to turn dovish in the short term as concerns about inflation from tariffs and layoffs remain overhead. However, the Fed needs to appease market sentiment about economic recession, so expectations of a rate cut appear half-hearted.

The Dilemma of Monetary Policy under the Debt Crisis

The US federal debt remains an important flashpoint in the current Fed policy dilemma. The total US debt has reached $36.2 trillion, and the average interest rate of 3.2% is the highest since 2010. Interest expenses are expected to reach $952 billion in fiscal year 2025, and may soar to $1.8 trillion in 10 years. In the first half of 2025, $9.2 trillion of debt must be refinanced. If the interest rate remains at 4.25%-4.5%, the interest cost will rise to $1.2-1.3 trillion, exceeding defense spending.

Source: Bloomberg

It is not difficult to understand why Trump is eager to reduce the debt burden by lowering interest rates, threatening to replace Powell, and putting pressure on the Fed through allies such as Musk. The author believes that this may be what everyone generally believes recently, that Trump intends to use “financial repression” to force the Fed to lower interest rates below the inflation rate to deal with the debt crisis.

Faced with the dual pressures of inflation rebound and economic recession, the Federal Reserve has indeed fallen into the contradiction of “raising interest rates to fight inflation” and “lowering interest rates to maintain growth.”

Source: wallstreetcn

One clear evidence for this view is that the Federal Reserve decided this morning to keep interest rates unchanged at 4.25%-4.5% in March, and significantly raised inflation expectations, raising the core PCE forecast for 2025 to 2.8% for the third consecutive time. Powell mainly hinted that tariff policies will push up inflation. However, just as I was writing this article, I saw Trump urging the Federal Reserve to cut interest rates as soon as possible to ease the impact of tariffs. This divergence and uncertainty in policy expectations highlights the ambiguity and complexity of market responses.

Source: @realDonaldTrump

Another intuitive data is that the 10-year US Treasury yield has dropped from 4.8% in January 2025 to 4.2%, reflecting the market’s strong expectations of an economic recession. However, the Atlanta Fed GDPNow model shows that GDP growth in the first quarter may shrink by 2.8% due to the drag of net imports. This “technical recession” contrasts with the steepening of the yield curve (short-end interest rates fall faster than long-end interest rates), suggesting that the market believes that the Fed’s interest rate cuts lag behind the pace of economic deterioration.

Source: GDPNow

In short, the huge uncertainty of this policy has been transmitted to the U.S. stock and crypto markets, resulting in disordered pricing of risky assets, with Bitcoin naturally being the first to be affected.

In the Economic Recession Cycle, Will the Crypto Market Rebound under Pressure?

As expectations of a U.S. recession intensify, not only have U.S. stocks been under heavy selling pressure, but the crypto market has also fallen back. The price of BTC fell from $102,000 in February to a low of $78,000, and is currently struggling near the 200-day moving average that separates bull and bear markets.

Source: Gate.io

The capital flows in the past two months have shown a trend of tightening liquidity. According to statistics from SoSo Value and CoinShares, BTC spot ETFs have seen a net outflow of more than $5 billion in the past two months. Digital asset investment products have seen capital outflows for the 17th consecutive day, setting the longest negative streak since records began in 2015, becoming a direct driver of the price plunge. In particular, BlackRock and Fidelity, two important long-term institutions in the past, have also turned to net selling, indicating that institutional concerns about recession risks have begun to spread.

Source: CoinShares

In addition, we need to pay attention to the fact that the market is currently dominated by speculation about the expected economic recession, which has suppressed other positive factors in the short term. Once other positive factors are implemented or deteriorate, they will resonate and suppress the currency’s price. In March, another topic of speculation was Trump’s bid to hold a crypto summit and promised to include BTC in the national strategic reserve. However, the policy was weak in implementation, which once again suppressed the price of BTC. We also explained this in the article “What Policy Signals Does The White House Crypto Summit Release?“ Readers can go and read it.

Of course, after a two-month decline, Bitcoin has shown signs of stabilization near the $80,000 cut-off price and is about to enter the traditional strong months, namely the “golden window period” of April and October. If the historical seasonal pattern repeats itself, there is still hope for a strong rebound.

Source: Timothy Peterson/X

In short, the impending US recession is not only the product of Trump’s radical policy adjustments but also the result of the Fed’s game of fighting inflation and stabilizing the economy. Against this background, BTC has seen capital outflows and a cooling of sentiment, exposing its usual weaknesses of high volatility and policy sensitivity. However, its unique deflationary attributes and geopolitical hedging needs may help it recover in April, but investors must still be cautious.