Policy Makers' Projections and Market Disconnect
Despite policymakers' median 'dot plot' projections and public statements indicating rates will likely remain high until year-end, futures markets are betting on a cut. The disconnect is partly due to fears that stress from the debt standoff could force the Fed to take action.
Congressional Agreement and Treasury Cash Depletion
If Congress disagrees, the Treasury will run out of cash between June and October, roughly coinciding with or after the peak of the most aggressive rate-hiking cycle in 40 years.
Debt Limit History and Unprecedented Situation
Congressional disputes over sovereign default are common, with 78 instances of debt limit changes since 1960. However, it is rare for such uncertainty to overlap with the Federal Reserve raising interest rates, making the current situation unique compared to past debt ceiling scares.
Interest Rates and Market Nervousness
The path for interest rates wasn't a concern in past debt ceiling episodes, but the culmination of factors this time is causing market nervousness, according to Gennadiy Goldberg, the U.S. rates strategist at TD Securities.
T-Bill Yields, OIS, and Comparing Crises
One way to compare historical crises is by examining the spread between T-bill yields and overnight index swaps (OIS). The current three-month bill yield is approximately 15 basis points higher than the three-month OIS, an unusual situation that points to investor reluctance to hold T-bills and uncertainty about monetary policy.
Debt Ceiling Risks and Monetary Policy
As the debt ceiling and monetary policy become more intertwined in the coming months, some people may be incorporating debt ceiling risks into their monetary policy expectations, says Benson Durham, head of global policy at Piper Sandler.
Economic Growth and the X-Date Factor
The Treasury may hope for faster economic growth in the first quarter to increase tax receipts and delay the X-Date when the U.S. government can no longer borrow to meet its financial obligations.
