FRB Powell’s speech was widely a nonevent. All markets sifted through comments from him and other Fed officials. Powell stated officials “will proceed carefully” on whether to raise interest rates again, while signaling policy will remain tighter for longer.
Powell remarked that the process of bringing inflation back to its target “still has a long way to go,”. At the same time, he suggested the Fed could hold rates steady at its next meeting in September.
There was no mention of the budget deficit which is described as “exploding.” The outlook for the federal budget right now is essentially unprecedented—crisis size deficits as far as the eye can see, even though the economy appears to be in good health.
When will the markets begin to worry about the sustained fiscal shortfalls on the scale that is projected by the CBO? Such concerns could push rates higher that only puts more pressure on public finances by adding to the government’s ballooning interest bills.
These concerns were intensified this month after the Treasury ramped up debt issuance, heralding a supply deluge that’s likely to last several quarters, and Fitch Ratings unexpectedly downgraded the country’s debt ratings.
How much debt is too much is an old debate. But there is a new twist underlying today’s potential angst. This year’s surge in the budget deficit—which more than doubled to $1.6 trillion in 10 months through July—looks like what happens when the government goes into recession fighting mode. Except right now the economy is growing at a decent clip, so far confounding the many pundits who had predicted a downturn this year.
Monetary and fiscal policies are intertwined. Government interest costs are soaring because of the Fed’s rate hikes. Net interest payment on the federal debt is now over $650 billion for the first nine months of the year up from around $350 billion annually when the pandemic hit. Interest expenses now consume 14% of tax revenue and are projected to be over 17% in the intermediate future according to Fitch.
Bloomberg writes maturities on Treasuries have gotten short in recent years, so that almost one third of the whole national debt needs to be rolled over within the next 12 months. And this does not consider additional issuance to finance larger deficits. In the current quarter net borrowings came in at $1 trillion.
The largest buyer of Treasuries—the Federal Reserve who purchased between 30% and 70% of net Treasury issuances of the preceding years—is now selling its vast holdings by $60 billion per month.
Will the national debt become the primary narrative? As stated, the debt debate is an old debate, however today it appears to be greater urgency than era’s past.
What will happen this week? Trading is expected to wane as the week progresses ahead of the Labor Day weekend.
The economic calendar is comprised of many top tier data points including the JOLTS Job Openings, ADP Employment Survey, a sentiment indicator, revision of second quarter GDP and its ancillary inflation indices, various inventory statistics and the BLS Employment report.
Last night the foreign markets were up. London was up 0.07%, Paris up 0.54% and Frankfurt up 0.33%. China was 1.14%, Japan up 1.73% and Hang Seng up 0.97%, Futures are up about 0.20% partially from the support that China is giving to its equity markets. The 10-year is up 1/32 to yield 4.24%.
