In today’s briefing:
- Debt Ceiling Deal Means Fed Has Less Control Over US Financial Conditions
- How the Treasury Refresh May Not Be Catastrophic
Debt Ceiling Deal Means Fed Has Less Control Over US Financial Conditions
- The most significant feature of the recently signed debt ceiling compromise is the pending resumption of government- guaranteed student loan payments that have been suspended since March 2020.
- Compromise debt ceiling agreement gives the Treasury a green light to replenish its General Account balance at the Fed, thereby incurring implications for financial markets and the banking system.
- Real economic activity remains resilient despite hype of tighter Fed policy, while financial conditions are not particularly tight and have eased since the concerns about the banking system in March.
How the Treasury Refresh May Not Be Catastrophic
- The U.S. Treasury market is expected to see a flood of new issuance which would draw liquidity from the financial system and create headwinds for the price of risk assets.
- Tthere may be a narrow benign liquidity path for the Treasury account reset if the assets parked at the Fed’s reverse repo facility shift into Treasury paper.
- Separately, a review of technical and sentiment conditions indicates that near term risk and reward are tilted to the downside.
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