Contributed by Doug Walters, Max Berkovich, David Lemire,
Here we go again! Once again, the debt ceiling debates have hit Washington with threats of government shutdowns and the unthinkable default on US debt.
Background
Congress sets a legislative maximum (“ceiling”) on the debt the Treasury can incur. We are at that level, and the Treasury is taking “extraordinary measures” to pay expenses and ensure obligations on borrowings are met (i.e. we pay what is owed to our creditors). Treasury Secretary Yellen believes these measures will allow the US to meet its obligations until early June.
Paying our previous obligations is a no-brainer, so what’s the problem? There’s a standoff in Washington. The newly appointed House Speaker was elected with the promise that spending cuts accompany the debt ceiling increase. The President wants no strings attached.
We’ve been here before. This is not new territory. Debt ceiling increases are regularly used as leverage for politicians to achieve their agenda. In the end, a deal always seems to get done. With that said, S&P did downgrade US sovereign debt from AAA to AA+ in 2011, calling out the political shenanigans around the process.
Our take… the next five months will be full of sensational headlines of impending doom, and in the end, a deal gets done. We can’t predict the future, though. The US could theoretically default; it’s just very unlikely. The best thing investors can do is ignore the inevitable grandstanding over the next five months. In addition (and as always), we recommend investors maintain well-diversified portfolios and put in place a process that will take advantage of any opportunities that arise if the unexpected happens.
PCE and GDP
Two big economic reports came out this week with important but hard-to-discern impacts on the economic and Fed policy direction. Basically, whatever case you care to make for recovery/recession or Fed policy, there was information to support your view.
First, PCE or personal consumption expenditures which is the Fed’s preferred inflation measure, indicates it is holding steady at a slightly lower level than a few months ago. However, it is still above pre-pandemic levels and Fed targets. The new “supercore” tells a similar tale. Many Fed officials indicated that they will dial back their interest rate increases next week but that rates will stay still higher for longer to confirm inflation’s defeat.
Next, GDP, or gross domestic product, which measures the economy’s overall output showed some resilience to end the year, but signs of potential weakness were beneath the headline numbers. The Fed is trying to restrain GDP growth without pushing us into recession – the soft landing.
Encouraging or discouraging is in the eyes of the beholder.
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