Treasury Needs Fed Cuts For ‘Interest Cost Control,’ One Bank Says
I'm a bit allergic to quasi-nefarious Fed-Treasury "partnership" narratives.
There's something profoundly silly about stating the obvious in conspiratorial terms, and a lot of Fed-Treasury narratives do just that.
The current iteration goes something like this. Demands on fiscal policy are growing, the US government's debt burden is too, Treasury's increasingly funding the deficit at the front-end, the Fed controls front-end rates, so the Fed has to cut to keep American's interest costs under
so many small businesses, homebuyers, somebody buying a used car would not mind some extra beer money themselves.
If inflation is going to be tolerated higher, they can start cutting by June. Not sure mortgage rates would drop by 150 since those loans are tied to longer end of curve, but 30s with a low 6 handle would be a relief for buyers, if it came to pass (but would also make inflation stickier – as prices would not go down). Curve could theoretically normalize if 10s hung around 4% (which depends on a lot of other factors). Pretty sure the folks at the top end of the economy in this scenario would be just fine (nearly always the case anyway), due to the market taking this in stride (or as our fearless scrivener has noted – just doesn’t care). The rest of the masses will get a bit of relief, but probably not enough to change their view on November (whichever way they want to vote).
The parabola of Chart 5 above obscures a couple facts that are hard to believe now. First, US interest payments as a percent of US tax receipts have also climbed, but have merely returned to levels last seen around the turn of the century before rate repression and ZIRP/NIRP. And at the current level around 35%, it’s hard to believe we once committed half of every dollar of tax receipts to interest payments (as we did in the 1980s). Setting my alarm somwhere in the middle — say 42% — with an “ample reserve” to keep snoozing if desired.
We are running into a trap. If inflation is not contained in the very near future, we will have 2 very bad outcomes of either high inflation or a debt crisis. I understand the argument that the Fed can just buy the debt and finance the deficit via MMT. However, MMT is only a viable option when the economy has low inflation and less than full employment. If the USA did not own the world´s reserve currency they would be in big trouble.
Would you trade (or re-denominate) your life savings for (into) Chinese yuan? If not, you’ve answered your own (implied) question.
Which is why some people are buying gold and crypto ahead of the US elections.
Would buy TIPS before Yuan. If the Treasury debt is nothing more than interest earning dollars, I would prefer to have inflation protected dollars if the Fed is forced into financial repression to bail out the Treasury.
The difference between 2% and 3% inflation doesn’t seem sufficient to create a crisis in the near future, especially if the 3% is seen as gradually declining.