Bitcoin (BTC), which is a cryptocurrency, was under selling pressure on Wednesday morning after a Federal Reserve (Fed), official stated that there were no compelling reasons to stop the tightening of liquidity. The Fed’s relentless tightening of liquidity has caused risk assets to be roiled, including cryptocurrency.

In an interview with FT published on Wednesday, Loretta Mester, President of the Federal Reserve Bank of Cleveland told FT that she did not see a reason to pause. Mester said that she would prefer to see rates raised and held for a period of time until there was less uncertainty about the direction the economy will take.

The poor China data, released early on Wednesday, likely increased the bearish pressures surrounding bitcoin and other risky assets. China’s official purchasing managers’ index (PMI) for May came in at 48.8, compared to a forecast of 49.5, signaling that manufacturing activity has contracted faster than expected in the second largest economy in the world.

CoinDesk’s data shows that Bitcoin, which is a pure bet on dollar liquidity, dropped by almost 2%, to $27 021, after Mester made his comments.

Futures linked to Wall Street’s tech-heavy Nasdaq index fell by 0.38%. This suggests a negative opening on Wednesday. The dollar index (which tracks the value of the greenback against major fiat currency) rose by 0.27%, to 104.40. Gold was stable, with a 0.2% increase at $1962 an ounce.

Since March 2022, the Fed has increased rates by 500 basis point to 5% to combat inflation. Mester’s support of another rate hike, and the higher for longer stance, comes after hotter than expected inflation data. This validates recent hawkish expectations of interest rates in the U.S.

The official data released on Friday revealed that consumer spending in America increased more than anticipated in April, despite the Fed’s preferred measure of inflation, the core PCE, rising to 4.4% yearly in April from 4.2% a year earlier. Fed funds futures indicate that traders do not expect the Fed will cut rates in 2019. They have priced a rate increase of 25 basis points for June.

Traders have consistently expressed their hope that the Fed will halt its rate hikes during the first half 2023, and instead resort to rate cuts to boost liquidity in the second. This is one of the main reasons for bitcoin’s over 65% gain year-to date. In April, the cryptocurrency reached a 10-month-high of $31,000. The dollar index fell by more than 12% over the seven-month period ending in April.

Mester said that the deal on the debt ceiling removes “a big piece of uncertainty” in the U.S. economic system.

The U.S. president Joe Biden and House Speaker Kevin McCarthy came to a tentative agreement over the weekend in order to avoid a default and suspend the $31.4 trillion. To avoid a default, the lawmakers must now push the deal through both the House and Senate.

According to CoinDesk, once the deal was approved, Treasury would start filling its coffers with bonds, and in the process sucking the dollar liquidity out of the system. This would be bad for risk assets in general.

UPDATE: May 31, 2023 at 10:39 UTC: Adds the weak China data to the third paragraph as a possible catalyst for the drop in price.

Parikshit Miishra is the editor.