On Tuesday and Wednesday this week the Federal Open Markets Committee (FOMC) meets to decide on the next step for the Fed to take on fighting inflation with interest rates. I share the view of most Fed watchers that the Committee is likely to raise interest rates by 25bps. This is a step down from the 50bps increase in December and the four 75bps increases the Fed made last year.
Clearly signals are showing a rapid decline of the inflation rate but the Fed seems committed to a 25bps increase at this week’s meeting. As I have written before I give Chair Powell an A for being transparent with respect to telegraphing policy moves so as not to surprise markets. The Chair and other Fed speakers have been clear in the weeks leading up to the meeting that the Fed still views inflation as too high and that they can’t take their foot off the interest rate pedal.
The focus of attention is not going to be on the 25bps increase but on the official statement the Committee releases after the meeting and the press conference the Chair has on Wednesday afternoon.
Powell is likely to continue making his central point that the Committee is data driven as to future policy. He may tip his hand as to whether or not success in the fight to curb inflation has been successful enough to pause at the next meeting. The pause would allow the Fed to more closely examine how the economy is digesting this week’s increase on top of the series of increases last year. I doubt if he will come out and claim victory and make clear it is time for a pause but as he put 25bps on the table at his December presser, I think he may put a pause on the table for the March meeting. The next meeting of the FOMC is March 21-22.
Debt Ceiling
The top policy issue in DC remains the struggle in Congress to increase the debt ceiling prior to a summer “drop dead” date for a default by the US Government. Treasury Secretary Janet Yellen has notified Congress that the Treasury has hit the statutory ceiling and that the Department has started to use the “extraordinary measures” that have been deployed by past Secretaries to extend the date before the debt ceiling prevents payments by the US.
The last few days have seen some significant developments: first, on Sunday Speaker Kevin McCarthy announced that he and President Biden will meet at the White House on Wednesday to start talks on the debt ceiling. Second, McCarthy made an unequivocal statement that Republicans will not cut Social Security or Medicare. Republicans were facing big headwinds from their constituents as Democrats hammered home the point that Republicans were prepared to cut these two popular programs in order to meet their spending cut demands. McCarthy knows he has a razor thin majority and cutting these popular programs is a strategy for Democratic victory in 2024.
Another problem for Republicans in achieving significant cuts is that most Members of Congress don’t want to cut defense spending. The recently passed spending bill for fiscal year 2023 had a $69.2B increase in Defense Appropriations bringing the total to $797.6B. Taking DoD, social security and Medicare off the table leaves little room for meaningful spending cuts.
McCarthy and Senate Leader McConnell have made statements that there will not be a default, and the White House meeting this Wednesday will hopefully be the first meaningful step in developing an exit strategy to avoid the financial abyss. Hopefully the McCarthy/Biden meeting will end with a statement of a resolve to find common ground and get a ceiling increase or suspension passed before Treasury establishes a drop dead date for default.