Treasury Default Hysteria Begins

While fights over Supreme Court and Federal Reserve Board nominations come sporadically as vacancies arise, there is one political battle we can almost always count on from year to year, and that is the struggle over extending the federal debt ceiling.

If it’s not increased, we’re told, the U.S. government will default on its obligations, Social Security and other government program beneficiaries will be rendered destitute, Treasury bondholders will see the value of their holdings decimated as they go without their interest payments, our soldiers and other government employees won’t get paid, and the global financial system will grind to a halt.

Most serious-minded adults, however (I hope), have learned to ignore this annual game of chicken that the White House and Congress insist on playing every year, although the financial press and media commentators profess to take it seriously.

Whichever political party controls the White House or the houses of Congress, the drama generally follows the same predictable format, namely the Democrats always favor raising the debt ceiling to avoid the catastrophes described in the first paragraph, while the Republicans express opposition in the name of fiscal responsibility.

Yet no matter how long the drama plays out, the outcome is always the same: the Republicans eventually knuckle under, life goes on and everyone gets their money, until the next debt debacle. Lather, rinse, repeat.

This year, it seems, the play has begun early.

Five whole months before the government allegedly runs out of money without a debt limit increase, Treasury Secretary (and former Fed Chair) Janet Yellen has already sounded the alarm and instructed her troops to put in place “extraordinary measures” to allow the government to keep paying its bills before it hits the current $31.4 trillion debt limit in June.

Yellen wasted no time in using the dreaded D-word to emphasize the supposed seriousness of the situation.

“A failure on the part of the United States to meet any obligation, whether it’s to debtholders, to members of our military or to Social Security recipients, is effectively a default,” she said. Continue reading "Treasury Default Hysteria Begins"

Jerome Powell's Declaration of Independence

Remember back about four or five years ago (was it really that long ago?) we heard a lot about how the Federal Reserve’s sacrosanct independence was being threatened because the incumbent in the White House at that time was trying to influence the Fed’s monetary policy?

We don’t hear that much about it anymore since the Oval Office and Congress switched sides, although the threats against that independence have grown even louder, largely because they don’t get reported on to nearly the same degree.

For example, last fall the chairman of the Senate Banking Committee, Sherrod Brown, and the then chairman of the House Financial Services Committee, Maxine Waters, both sent letters to Fed Chair Jerome Powell decrying his recent policy of raising interest rates by more than 400 basis points since March to combat inflation. “You must not lose sight of your responsibility to ensure that we have full employment,” Brown wrote.

Around the same time Sen. Elizabeth Warren, another Democrat, said Powell “risks pushing our economy off a cliff.” Warren, who loudly voted against Powell’s reappointment as Fed chair, added, “There is a big difference between landing a plane and crashing it.”

I suppose they have a right to criticize Fed policy as much as anyone else, although that right should extend to members of both parties. To his credit, Powell has largely kept silent or muted his comments on these attacks.

But now it appears that Powell believes he is being pushed too far. Criticizing the Fed for the way it conducts monetary policy to maintain stable prices and full employment—its legal mandate from Congress, after all—is one thing.

But to force the Fed to go way beyond its mandate and do something that is the rightful purview of Congress is an entirely different matter. And Powell said he won’t stand for it.

I’m talking about the desire of many progressives and environmentalists to have the Fed impose their views on climate change on the banks the Fed regulates and the customers those banks serve. Continue reading "Jerome Powell's Declaration of Independence"

My Latest "Prediction" For 2023

Back in March I posited the notion that the S&P 500 would need to fall to about 2,900 before all of the froth that the Federal Reserve had injected into the market through its various monetary stimulus programs dating back to the Great Recession had finally burned off.

On Christmas Eve the S&P closed at 3844, which would put it 19% below its all-time high of 4,766 on December 27, 2021, or about a year to the day.

In recent days some market prognosticators have been warning that the market is poised to fall another 20%, which would put the index at about 3,000, or slightly above my guesstimate.

So do I feel vindicated, if that is the right word? No, and I hope I’m wrong anyway.

First, my guess was not a prediction, just a quick back-of-the-envelope calculation based on my assumption that the Fed was responsible for about half of the stock market’s 600% gain between the March 2009 bottom of 683 and the time I made my comment.

So, if we cut that 600% gain in half, that would reduce the S&P’s gain to a still respectable 300%, or a little below 3,000.

Not an educated estimate, maybe, but I thought a reasonable guess—a worst case scenario, if you will.

Second, we don’t know if these bears will turn out to be right. I hope they’ll be wrong.

I now believe the Fed won’t have to drive the economy into the tank in order to get inflation down to where it wants it to be, probably in the 2.5% to 3% range.

Remember, about two years, in what was considered to be a major policy shift, the Fed said it was willing to let inflation “overshoot” its long-term target of 2% for a time, as it indeed it did.

Now it looks like inflation is dropping a lot faster than most people thought, and the Fed itself is now forecasting that inflation will fall to 3.1% next year before declining in 2024 to 2.5% and 2.1% in 2025, i.e., putting it at its long-term target. Continue reading "My Latest "Prediction" For 2023"

Reasons to be Optimistic

As expected, the Federal Reserve raised the target for its benchmark federal funds interest rate by 50 basis points at its mid-December meeting, to a range between 4.25% and 4.5%.

That was down from the 75 basis-point hikes at its four previous meetings, yet the market’s immediate reaction to the move was an immediate selloff.

Was that a classic “buy on the rumor, sell on the news” reaction — i.e., the Fed delivered exactly what Chair Powell had earlier indicated it would do?

Or was there some element of disappointment that the Fed, despite the more modest rate increase, included in its updated economic projections that most officials expect to raise rates by another 100 basis points, to about 5.1%, next year?

But was that really a surprise, given earlier comments from Powell and other Fed officials?

On a positive note, according to the Fed’s revised economic projections, it now expects inflation to fall to 3.1% next year before declining in 2024 to 2.5% and 2.1% in 2025, putting it at its long-term target.

In November, the year-on-year increase in the consumer price index fell to 7.1% from 7.7% a month earlier, down sharply from June’s 9.1% peak. So it looks like the Fed is optimistic about where inflation is headed, whether its rate-rising regimen deserves the credit or not.

It's also now calling for U.S. GDP to grow by 0.5% next year, unchanged from this year’s pace, before climbing to 1.6% in 2024.

By way of comparison, the economy rebounded at an annual rate of 2.9% in the third quarter following two straight quarters of negative growth.

The Fed projects the unemployment rate to jump to about 4.5% over the next three years, up from 3.7% currently, due to its rate increases. Continue reading "Reasons to be Optimistic"

The Fed Needs To Practice Patience

It’s beginning to look a lot like 50 basis points.

OK, that’s not as catchy as that more famous Christmas tune. But that’s shaping up to be the likely outcome at the Federal Reserve’s next two-day monetary policy meeting December 13-14.

While inflation has slowed only a little bit since the Fed’s last rate hike on November 2 — its fourth 75-basis point increase in a row – the consensus seems to be that the Fed will moderate the size of its next hike to 50 bps, for no other reason perhaps than to see what effect its rate-raising process has had on the economy.

Indeed, the minutes of the Fed’s previous meeting at the beginning of November signaled such an outcome. “A substantial majority of participants judged that a slowing in the pace of increase would soon be appropriate,” the minutes said.

The Fed has now raised its benchmark federal funds rate by a cumulative 375 bps since it started hiking rates back in March, when the rate was at zero. A 50-bp hike in December would put the fed funds’ rate at an upper range of 4.25%.

While a slight moderation in the next increase will be welcomed by just about everyone, from Christmas shoppers to homebuyers to investors, it’s not likely to be the last, and possibly for a while yet.

That was the word handed down this week by New York Fed President John Williams. While he “did nothing to push back against expectations” of a half-point rate rise at the December meeting, the Wall Street Journal’s headline was more hawkish, quoting Williams as saying that “inflation fight could last into 2024,” meaning more rate hikes over a longer period of time than the market expects.

“Mr. Williams said he expected that rates would have to rise in 2023 to somewhat higher levels” than he had estimated back in September, the Journal said.

If the whole point of the Fed’s rate-raising regime is to try to slow the economy and thus reduce the heat under inflation, you don’t have to be a Harvard-trained economist to see that it hasn’t made that much of a dent so far and that it’s a long way from ending its restrictive cycle. Continue reading "The Fed Needs To Practice Patience"