Too Much Debt, Too Little Time – A Look Ahead To Fed Meeting Tomorrow

Higher than expected borrowing amounts announced yesterday by the Treasury at its Quarterly Refunding Announcement for both 2Q and 3Q24 suggest weaker than expected tax receipts despite most folks believing that tax receipts were going to come in better than expected given strong capital gains achieve in 2023. 

As a result, the budget deficit is going to keep blowing out with no signs of abating as DC is completely dysfunctional with no appetite for tax hikes or spending cuts. We have moved the Overton Window here on the public’s understanding that the deficits will never get paid back in anything other than deflated dollars. The question is how much is Powell going to continue to be the “Enabler in Chief” head of the Fed that never allows bond vigilantes to do any real disciplining on the government because the Fed consistently elevates the primacy of its mandate to maintain smooth UST market functioning over its other mandate to control inflation. 

With inflation continuing to run above target and re-accelerating, labor markets remaining firm and nominal GDP continuing to come in hotter than expected, running 6%+ deficits will just continue to be inflationary unless the Fed tightens policy more aggressively, either by raising rates materially to truly crush private sector demand or by winding down its bloated balance sheet more aggressively (not thinking about tapering QT would be a good start, they should be selling assets). 

Powell needs to deliver a hawkish message this week that he is going to bring inflation down to 2% come hell or high water. If he doesn’t introduce dual sided risk that the Fed’s next move may have to be a hike, the bond market is going to continue to puke as investors flee duration USTs, providing a further headwind to all risk assets.