The political limits of raising interest rates
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White House officials face a hard post-election truth: If the U.S. economy slips into recession next year, the government could struggle to help much.
The constraints are twofold, explains Marc Goldwein, senior vice-president of the Committee for a responsible federal budget, to your host MM. Rising interest rates cause the government’s debt costs to skyrocket, eating up more of the federal budget and increasing its bottom line. Despite a record decline in the deficit in fiscal year 2022, net interest payments soared to $475 billion, a 35% increase. And they are expected to continue to rise.
That’s mostly a political constraint: While there’s still a healthy investor appetite for U.S. debt, rising costs will undoubtedly make it harder for lawmakers to borrow more, Goldwein said.
The second constraint is economic: A sharp increase in deficit spending — the kind that policymakers have deployed in previous downturns to cushion the economy — could stoke inflation, making it harder for the Federal Reserve to rein in pressures on governments. price.
From your host MM: ‘In practice, this means that government spending, from big items on the agenda to possible support for struggling households, should be offset by tax increases or spending cuts, not more borrowing, a colossal obstacle even when the party president controls both houses of Congress.
White House officials said they weren’t worried – the president has always offered to pay for his policies, and nothing has changed that view. Nor do they see the US fiscal space, or ability to borrow, as having shrunk much, if at all, in the long run.
But what will the markets think? Planned tax cuts for the wealthy, announced by British officials last month, sparked a market crash that forced the Bank of England to step in to buy government bonds and led Prime Minister Liz Truss to resign just six weeks into his term.
“The lesson from the UK is that markets are going to be much more vigilant about any fiscal plan in this environment, particularly for countries with a large stock of debt that potentially enter an economic downturn and see rates rise interest increase significantly,” said Daleep Singh, chief global economist at PGIM Fixed Income and former deputy director of Biden’s National Economic Council. “You have to be really careful.”
IT’S MONDAY – We are rested and ready for GDP, PCE and all the other acronyms this week has in store for us. Do you have a tip, a story idea or a comment to share? Let us know: [email protected] and [email protected].
S&P manufacturing and services PMI release at 9:45 a.m. … Treasury Secretary Janet Yellen speaks at SIFMA annual meeting at 11 a.m., followed by SEC Chairman Gary Gensler at 12 p.m. 50 and CFTC Chairman Rostin Behnam at 1:40 p.m.…Consumer confidence index released Tuesday…International trade and new home sales data released Wednesday…First estimate of third-quarter GDP released Thursday…Inflation and consumer spending released Friday… University of Michigan Consumer Sentiment Index released Friday.
HAPPY MONDAY – The insurance and wealth management firm AXA’s annual global survey has identified climate change as the greatest threat facing the world. It is the first time in its nine years that climate is identified as the main risk in each geographical area studied, with geopolitical and cybersecurity dangers also high. “The report confirms a trend that has been evident for years: an increase in the general feeling of vulnerability and an erosion of confidence in the ability of institutions to find durable solutions,” CEO Thomas Buberl said in a statement. “In fact, I see this as the biggest risk facing us: the feeling of helplessness.”
FIRST IN MM – GOLDMAN SACHS WANTS SBA ON THE AGENDA – As the midterm elections approach, Goldman Sachs – through its 10,000 small business votes – says it is stepping up pressure on midterm election candidates to set specific policies that will help small businesses. The bank’s small business program released a policy wish list earlier this year that urged lawmakers to reauthorize the Small Business Administration, approve or renew tax credits and relaunch loan programs for the era of the pandemic.
GDP WEEK — The first estimate of third-quarter GDP is published Thursday at 8:30 a.m.
“The U.S. economy should have seen robust growth in a sharp rebound from the first half of the year,” writes WaPo’s Abha Bhattarai, “but most Americans are unlikely to notice the turnaround. …
“This is going to look better than the previous two GDP reports, but conditions on the ground haven’t changed much,” said Douglas Holtz-Eakin, president of the American Action Forum and former director of the Congressional Budget Office. .”
Meanwhileby FT’s James Politi and Colby Smith: “Joe Biden’s best economic adviser [National Economic Council Director Brian Deese] said the U.S. economy had the “strength and resilience” to shield it from a recession, brushing aside growing concerns that steep interest rate hikes designed to fight inflation would undo the expansion.
CAN’T FIGHT THE CEILING – President Joe Biden said Friday he “won’t give in” to GOP demands to cut spending or face a standoff on the debt ceiling next year, our Adam Cancryn reports. But he also ruled out eliminating it altogether, saying such a move would be “irresponsible”.
HOUSING DECK — Our Katy O’Donnell: “A government-run housing agency has backtracked on plans to force mortgage lenders to bolster their capital reserves in the face of a possible recession after industry officials warned that this decision could rather disrupt the market.
IRS LIMITS — Our Brian Faler: “Thanks to inflation, people will be able to accumulate more money next year in tax-advantaged retirement accounts. The IRS announced Friday that the limit on contributions to 401(k) retirement accounts will rise next year to $22,500, an increase of $2,000.
Speaking of tax: “With less than three weeks into Charles Rettig’s tenure as Commissioner of the Internal Revenue Service, President Biden has chosen no one to replace him, leaving the tax agency without a leader to lead the agency’s expansion. $80 billion bill that Democrats just pushed through Congress,” reports WSJ’s Richard Rubin.
A REAL ROUND NAILS — WSJ’s Tom Fairless: The world’s central banks “raised interest rates this year at the fastest pace in decades. But these hikes operate with what economists call “long and variable” lags, so central banks could not know for years whether they have tightened too much or not enough.
PROFITS SEASON? MEH — WSJ’s Paul Berger: “The early results of the third-quarter earnings season didn’t bring much comfort to nervous investors. While some business leaders noted bright spots for consumers and the economy, many pointed to a host of challenges to earnings, including persistent inflation, rising interest rates and a generational surge in the dollar which put pressure on the income generated abroad.
WALL STREET HEADS VISIT SAUDI SUMMIT — Bloomberg’s Matthew Martin: “A growing dispute over an OPEC+ decision to cut oil production risks causing lasting damage to the political relationship between the United States and Saudi Arabia. Wall Street seems unfazed.
Jamie Dimon, CEO of JPMorgan Chase & Co., and David Solomon of Goldman Sachs Group Inc., are among US finance chiefs preparing to attend this week’s Riyadh investment summit, a showcase for the Saudi Crown Prince Mohammed Bin Salman.
Goldman Sachs’ decision this week to pull out of retail banking following disagreements over strategy that, in one instance, pitted chief executive David Solomon against his subordinates, people familiar with the matter said. —Joshua Franklin of FT
The fall of Truss, British Prime Minister for just six tumultuous weeks, has plunged the country into a new phase of economic uncertainty. — NYT’s Eshe Nelson
The Nasdaq slowed down on the IPO preparations of at least four small Chinese companies as it investigates the short-lived stock market rallies of these companies after their debut, according to lawyers and bankers who work on these share launches. — Echo Wang of Reuters