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Debt Ceiling – In this article you’ll find:
Bank of America – Is the Fed Serious About a 2% Inflation Target?
- INFLATION COMES DOWN
- FUTURE FED POLICY
- THE BEAR MARKET HAS NOT HIT BOTTOM
- RATE CUTS
- DEFENSE SPENDING
- IMPACT ON GDP
- US NEW HOME SALES
- INTERNATIONAL TRADE DEFICIT
- CONSUMER SENTIMENT
- PERSONAL INCOME
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ENJOY THE ARTICLE
Bank of America – Is the Fed Serious About a 2% Inflation Target? 
– “Recent Fed officials’ comments have raised the possibility that they may pause at the June rate-setting meeting.”
– “For now, the market is anticipating the possibility of only one more hike, but persistent inflation could keep the policy of alternate meeting hikes in play longer than the market anticipates.”
INFLATION COMES DOWN
– “The key will be how rapidly inflation comes down over the rest of the year and, perhaps more importantly, how much inflation the Fed decides to tolerate over the next few years.”
– “The Fed has not updated its amended long-term inflation goals statement from August 27, 2020, which explicitly called for inflation to run above 2% to make up for prior shortfalls.”
FUTURE FED POLICY
– “If the Fed is serious about its 2% target, we would expect policy communication that would acknowledge that a period of below 2% inflation is necessary to offset at least some of the 2021-2023 inflation overshoot, the biggest in over four decades.”
– “The issue of future Fed policy and inflation has created uncertainty in the equity market. It allows for a bull scenario where inflation runs higher over time and where the Fed turns easier sooner than the 2% inflation mandate would warrant.”
– “This view, which is predominant in the interest-rate markets where several rate cuts are priced in for the next year, assumes that policymakers would not tolerate the consequences of inflation being forced below 2% for a while to make it average 2% over time.”
THE BEAR MARKET HAS NOT HIT BOTTOM
– “The bearish view believes the Fed will need to stay tight longer given the big inflation overshoot of the past three years.”
– “After 13 straight monthly declines, leading indicators clearly point toward a recession, and earnings are likely to decline substantially more in a recession rather than rise from here, as the bulls hope.”
– “In that case, the bear market has not hit bottom, and it would be premature to expect a new bull cycle to have begun.”
RATE CUTS
– “Rate cuts, however, require much lower inflation and earnings than the market wants to believe.”
– “In our view, the ingredients for a cyclical upturn in earnings are still missing given the ongoing tightness in labor markets, the declines in leading indicators, and the Fed’s stated desire to bring inflation down.”
– “Whether it’s to 2% or 3%, we doubt the Fed will surrender at the current 4% to 5% inflation rate.”
BlackRock – U.S. stocks climbed to 2023 highs after the debt ceiling deal
– “We see the market’s focus returning to higher-for-longer rates and sticky inflation after a U.S. debt ceiling deal.”
DEBT CEILING DEAL
– “U.S. debt ceiling deal removes near-term uncertainty and thrusts the market’s focus back to the macro picture: sticky inflation due to tight labor markets.”
– “We see rates staying higher for longer as a result.”
– “The U.S. debt ceiling deal has taken the near-term risk of default off the table.”
– “Yet the fiscal situation remains challenging, in our view. Total public debt as a share of GDP has jumped to around double the level in 2005.”
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– “The budget deficit is also already large at a time when the economy is overheating.”
– “The debt deal doesn’t really change this picture, we think.”
– “The spending cuts are a fraction of what was cut in the last debt ceiling showdown in 2011: about 0.3% of GDP, according to the Congressional Budget Office, compared with 1% in 2011.”
– “We don’t see spending cuts dragging on growth in the same way as a result.”
– “But we do think higher-for-longer interest rates will raise debt servicing costs and could leave debt levels growing in this new macro regime.”
– “We have said the market focus would move back to the macro picture after the debt ceiling deal – now the Federal Reserve and stubborn inflation are retaking the spotlight.”
Moody’s Analytics – What’s behind the US Debt Limit Deal?
– “The legislation suspends the nation’s $31.4 trillion borrowing limit until January 2025, thereby removing the debt limit as an issue until after the 2024 presidential election.”
– “In exchange for suspending the limit, Republicans extracted several policy concessions from the White House.”
DEFENSE SPENDING
– “The most important of these are the caps on the federal discretionary budget that the bill imposes for fiscal 2024 and 2025. Under the bill, nondefense spending is to remain roughly flat in fiscal 2024 and then increase by 1% in fiscal 2025.”
– “Meanwhile, the defense budget will grow by 3% in fiscal 2024, which would be consistent with Biden’s request in his fiscal 2024 budget proposal.”
– “However, the Fiscal Responsibility Act limits growth in the military spending budget to 1% in fiscal 2025.”
IMPACT ON GDP
– “At the peak of its macroeconomic impacts in late 2024, the debt limit deal will reduce real GDP by 0.15%, boost the unemployment rate by 0.1 percentage point, and cut nonfarm employment by 120,000 jobs.”
– “The nearly 10% increase in nonemergency, base discretionary funding for the current fiscal year will limit the macroeconomic fallout from the discretionary spending caps under the agreement.”
US NEW HOME SALES
– “U.S. new-home sales were a bright spot in April, increasing from a revised 656,000 annualized units (previously 638,000) in March to 683,000.”
– “From a year earlier, sales have increased nearly 12%. April’s reading is further evidence that housing activity is improving.”
INTERNATIONAL TRADE DEFICIT
– “The advanced international trade deficit widened to $96.8 billion as exports fell and imports rose, which will likely add another drag on second-quarter GDP.”
– “The decrease in exports was robust across goods but particularly pronounced for industrial supplies, consumer goods and miscellaneous goods.”
CONSUMER SENTIMENT
– “Consumer sentiment also remains in recessionary territory, according to the University of Michigan index.”
– “While up from its record low in June 2022, the index remains below where it started this year, coming in at 59.2 in May, according to the final report; that is well below April’s 63.5 but a larger-than-expected revision from the preliminary 57.7.”
PERSONAL INCOME
– “Personal income in the U.S. rose 0.4% in April, in line with the Moody’s Analytics forecast.”
– “April’s increase follows 0.3% expansions in March and February. The still-solid labor market has kept wages and household income growing.”
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