2023-10-18 12:50:03
The Federal Reserve faces potential policy risks as it grapples with investor concerns about the U.S. government’s massive $33.5 trillion debt. The concerns have sent U.S. Treasury yields soaring, surprising policymakers and prompting them to consider temporarily delaying plans to raise interest rates again.
Analysts pointed out that concerns about deficits and debt have put upward pressure on bond yields, potentially slowing the economy and pushing up unemployment. At the same time, these concerns could also trigger higher inflation, especially if the Fed is seen as limiting the federal government’s borrowing costs and diluting its goal of stabilizing prices.
“We are witnessing a shift in investors’ views on U.S. fiscal sustainability,” said former Fed governor Kevin Warsh.
To be sure, there are other factors at work behind the decline in U.S. bond prices.USA 10-Year Treasury Bond YieldYesterday it rose to 4.83%, and as recently as April 6 this year, the U.S. bond yield was still at a year-low of 3.31%. The main reason is that the U.S. economy has shown resilience in the face of the Fed’s most aggressive interest rate hikes in decades.
Ball’s remarks are widely expected to have a wide impact on U.S. bond yields
Fed Chairman Jerome Powell will speak at the Economic Club of New York at 12 a.m. Taiwan time on Friday (20th) to elaborate on his views on monetary policy and economic outlook. Observers expect Ball to acquiesce to the growing offensive among policymakers that rising bond yields give them an opportunity to keep rates on hold at this month’s monetary policy meeting.
Bloomberg economist Anna Wong said the recent surge in 10-year U.S. Treasury yields will dampen economic growth, similar to a pause in interest rate hikes. Bloomberg Economics estimates that the rate hikes since the September 19-20 Federal Open Market Committee (FOMC) meeting, if continued, should reduce the need for a 50 basis point rate hike.
“As long as inflation remains above the central bank’s target, the threat of raising interest rates will remain,” said Julia Coronado, founder of MacroPolicy Perspectives LLC and then-Fed economist.
Former Fed Vice Chairman Donald Kohn said that Ball and other officials should express their views on the impact of U.S. fiscal policy on the economy, interest rates and the central bank. “It would help the U.S. economic conversation if they at least talked about the consequences for monetary policy and the economy,” said Cohn, now a senior fellow at the Brookings Institution.
No end in sight for U.S. debt worries markets
The Fed’s budget has been widely believed to be on a path to rapid debt growth for some time, but a series of recent events have brought those concerns to the fore.
In August this year, credit rating agency Fitch Ratings canceled the AAA credit rating of the United States, and the Treasury Department announced a higher-than-expected bond issuance scale. The Congressional Budget Office estimated last week that the deficit jumped more than 20% to $1.7 trillion in the fiscal year that just ended, adding to external concerns.
Fed Governor Christopher Waller said at the E2 Summit in Utah last week that it was hard to believe this was a sustainable policy. However, U.S. government officials insist that President Biden’s efforts to reduce the budget gap and increase public infrastructure spending to promote private investment to combat climate change will help the economy in the long run.
Biggest buyer of government bonds pulls back, Fed’s QT still underway
But it’s not just the increasing issuance of U.S. debt that’s spooking investors, but also weakening demand. Many investors worry that China and Japan, the two largest foreign holders of U.S. Treasuries, will scale back their purchases.
Meanwhile, the Fed itself is already engaged in quantitative tightening (QT) operations. Officials have hinted that QT will continue even after expected rate cuts begin sometime next year.
Douglas Holtz-Eakin, former director of the Congressional Budget Office, said rising U.S. bond yields could worsen an already untenable fiscal outlook. “Our budget is very sensitive to interest rates, and if the bond market starts to read more accurately the effective fiscal position of the United States, then we’re going to be in trouble,” he said.
Holtz-Eakin agreed that it is extremely difficult to have a stable monetary policy without a sound fiscal policy, and U.S. policy is clearly unsound.
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