Closer to Certainty
The upcoming challenge to congressional approval to increase the debt ceiling is being hailed as the next crisis. This might be true, but why is anyone surprised by this? After all this argument has been around since managing the debt ceiling was introduced over a century ago. The problem today is the same, that is both parties want to raise the ceiling, and both want to add some extras into the bill. But there is also a difference, that when the customary threat of government closure is near, confidence of the even tempered heads has always been that the Fed coming to the rescue should that happen. But as outlined in a recent commentary written by a long followed chief economist at First Trust, Brian Westbury, gives a clear outline on how in the past few years the Fed has used its balance sheet capital, raised from Treasury and MBS interest and interest earned from bank deposits. The problem, interest rates aren’t as high as they used to be, and a recent slowdown in bank deposits, resulting from recent bank disruptions, have both left he Fed with less money than usual. Perhaps too complicated to be grappled by the media, but important to pay attention to nonetheless. This is because this particular problem could well have a negative impact on Treasuries, and will likely encourage some volatile corrective activity in equities. In the meantime, the broad indexes are technically overbought and if this is the trigger to bring it on, so be it. But I’ll focus on the primary goal, which historically has always been the outcome.
This week the data for the consumer price index (CPI) and Producer Price Index (PPI) were released and both were impressive on face value, declining on a yearly basis to 5% from 6% and 2.7% from 4.9% respectively. While the market has responded favorably, in my opinion, the data shows inflation is down from its highs, but still high enough for the Fed, which raises the likelihood of another rate hike at the meeting in early May. As previously mentioned here, the year over year data is likely to continue its current trend lower. However, at some point, the year over data will be low enough to rise due to post recessionary growth or further growth in energy and industrial costs. What this implies is that further increases beyond May might have to occur even as spot economic data appears to show a slowing in retail, new home sales, durable goods and wage growth, the core fuel for inflation.
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