Fed Monitor: Credit Crunch, Debt Ceiling, and Strong Data

Summary of Key Issues

Since the 3 May FOMC meeting, strong growth and inflation data together with FOMC comments have shown that an extended pause is not a done deal. FOMC members generally see no decisive evidence that inflation trends are reverting to the 2% target.

At the same time, the tightening of credit conditions is in line with previous Fed tightening cycles, while credit demand is weakening. As a result, FOMC members lack clarity on the macroeconomic impact of the banking crisis.

The debt ceiling standoff is adding to this conundrum. It seems more likely than not that the US will pass the x-date without an agreement. If so, the Fed is likely to be entirely focused on ensuring that Treasury markets continue to function. This includes implementing the interest and other payments prioritization the administration is likely to adopt.

In the absence of a debt ceiling crisis, I would expect the Fed to hike in June and pause in July.   With a debt crisis, I expect the Fed to pause until the crisis is resolved, and hike thereafter.    There is also a good chance that the June SEP could show a higher 2023 FFR. This is based on my assumption that a debt crisis would get resolved fast enough to have no lasting impact on markets and economy.

Latest statement

Latest minutes

Current Fed Forecast

Recent FOMC Comments

Markets Under-Pricing the Fed

Economic Data Still Calls for More Fed Tightening

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed, the IMF, and the World Bank. She joined Macro Hive soon after its inception.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)