Since December, The Federal Reserve increased its 2024 projected growth rate by 50%. It is now forecasting the economy to expand by 2.1% from 1.4%. Private sector economists are following suit now, suggesting a 2.2% annual growth rate. Bloomberg writes this pace is more than double the rate expected in September. The odds of a recession in the next 12 months dropped to 35%, the lowest since July 2022 and down from 65% in September.
Partially against this backdrop monetary policy assumptions are changing. Atlanta’s Fed President Raphael Bostic reiterated his expectation of only one interest rate cut this year. Fed Governor Lisa Cook stated the Federal Reserves “must take a cautious approach to cutting interest rates to allow more time for inflation to slow down in some segments of the economy.”
Further analysis of the Fed’s revised “dot plot” released last week suggests the base case for three rate 25 bps rate cuts as “weak,” almost reducing the consensus view to only two reductions.
Interest rates have always been extremely important but today are perhaps more significant than ever. The US Treasury markets is regarded as the largest and most important financial market in the world, a market that is growing by “leaps and bounds.”
According to the WSJ, annual issuance of Treasuries has exploded, nearly doubling since the pandemic began, selling a record $23 trillion worth in 2023.
The Journal writes the government raised a net $2.4 trillion in 2023 to fund that year’s budget gap.
The Treasury market has grown more than 60% to $27 trillion since the end of 2019, about six-fold larger than before the 2008-09 crisis according to Dow Jones.
Many times the lack of liquidity in the Treasury market has been discussed, the result of reforms from the Great Financial Crisis. Also discussed at length are the guidelines surrounding the maturity profile of the debt. Historically about 20% of the debt is recommended to mature in one year or less.
Because of volatility and “other issues,” about 22.4% of the debt now matures in one year or less.
The total Federal deficit is now over $34 trillion, projected to be $36 trillion in quick order, thus a 25-bps difference in yield amounts to a huge sum of money. Interest expense will soon rise to be the largest item in the budget, crowding out other expenditures.
Many are forewarning of the potential impending ominous storm, using metaphors such as walking into a buzz saw.
Washington is not addressing the issue and unfortunately if history is a guide to follow, it may take a crisis to enact reforms.
Unfortunately, this fiscal crisis may be very ugly with great acrimony and dissention.
Returning to the here and now, equity markets were relatively quiet yesterday, however the Treasury market sold off modestly. Friday is the release of the monthly PCE data. If the data differs from the consensus view, the reaction may be amplified given most participants will be off for the Good Friday holiday.
What will happen today?
Last night the foreign markets were up. London was up 0.01%, Paris up 0.15% and Frankfurt up 0.60%. China was up 0.17%, Japan down 0.04% and Hang Seng up 0.88%. Dow and NASDAQ futures are up 0.2% and 0.4%, respectively, even as the disconnect between earnings expectations and prices is further rising. The 10-year is up 1/32 to yield 4.24%.
