Debt ceilings aren’t the only thing that matters to markets

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“Once the debt crisis is over, the focus will likely shift back to the Federal Reserve,” Daleep Singh, chief global economist at PGIM Fixed Income, said in an interview. The Fed has been raising rates since March 2022 in its fight against inflation and will have to decide what to do at its next meeting in June. “The Fed faces a triple risk,” he said. These include:

  • The tighter fiscal policy that House Republicans are demanding from President Biden as a prerequisite to raising the debt ceiling could hurt the economy.

  • The delayed impact of the Fed’s restrictive monetary policy. Is a recession approaching? Has Inflation Been Overcome? Should the Fed raise interest rates further, keep rates unchanged, or start cutting rates to avoid a recession?

  • Possible rekindling of the banking system. Regional banks such as Silicon Valley Bank and Signature Bank were bailed out by regulators, First Republic was acquired by JPMorgan Chase, and banks such as PacWest, Western Alliance, Comerica and Zions Bancorp came under pressure. ing. The runs and long-term investment losses exacerbated by the Fed’s rate hike policy could resume if the Fed keeps rates at current levels or raises them further.

Curiously, the debt ceiling crisis has brought temporary relief to many of the country’s banks, according to a recent study by economists at Moody’s Investors Service. “The deadlock in the debt ceiling is good for banks,” Jill Cetina, associate managing director at Moody’s, said in an interview.

But once the debt ceiling is lifted and the Treasury begins to raise money by selling large amounts of bonds, investors’ purchases of bonds on the open market will drain money from the banks. “Maybe not as expected, but the resolution of the debt ceiling crisis will be a headwind for banks,” he said.

Global tensions remain high. Russia’s war on Ukraine is raging at a staggering cost. Its supporters, if not official allies, Russia and China are nuclear powers and threaten a tragic escalation of the conflict as NATO countries provide Ukraine with increasingly deadly military aid. cannot be completely ignored. From a purely economic point of view, energy prices have fallen significantly from their peaks at the start of the Ukrainian war, but further unexpected shocks remain possible. The US-China relationship is troubled, and global trade relations are strained.

Moreover, although the pandemic emergency is over in the United States and many other countries, the coronavirus is still present, still causing severe death tolls and suffering. The virus killed 840 people in the United States in the week of May 4 alone, with the death toll rising steadily to 1,133,684. Thousands of people suffer the long-term effects of this disease.

In an economic sense, the impact of COVID-19 is still continuing. The expansionary fiscal and monetary policies enacted in 2020 to combat the coronavirus-induced recession have been remarkably successful in restoring economic growth. But the rise of inflation that has spread across the global economy over the past two years is also partly due to these policies and the virus-induced supply shock. Even if the U.S. didn’t get another coronavirus outbreak, the economy and markets would still be readjusting, the Federal Reserve would be in a quandary, and countries like China would continue to have severe epidemics.

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