Monetary Policy is Important, but US Fiscal Stance Moving Center Stage

The Federal Reserve hiked rates in March.  Whatever gradual
hikes mean, it seems to preclude moves in back-to-back meetings.  There
are two chances of a May hike:  Slim and none
and Slim left town.  

June is a different story.  Anticipating the economy finding
better traction, and a non-disruptive conclusion of the French presidential
election, we continue to think a June hike is the most likely scenario. 
Bloomberg’s calculation puts the odds of a June hike near 47% down from closer
to 56% a week ago.  The CME puts the chances at nearly 55%, down from 59%
at the end of last week.  So far this week, the implied yield on the June Fed funds futures contract has
risen 1.5 bp to 97 bp.  

The focus may shift back to fiscal policy.  There are two large
outstanding issues.  The debt ceiling, which was reinstated March 15.  The second is spending authority,
which expires near the end of the month, just ahead of Trump’s 100th day as

The imposition of the debt ceiling forces the US Treasury to take
extraordinary measures.
  An analyst who previously worked at the
Federal Reserve suggests that among the measures are the boosting of cash balances, which in turn drains the excess
reserves and is one of the factors that have boosted the cross-currency basisThis,
in turn, is
a drag on the US dollar.  

Often the increase in the debt ceiling, which allows the US government to
pay for what it was authorized to spend is a source of negotiation with
Many people thought that with one party in control of both
the legislative and executive branches, that this would not be a battle this
time.  However, as we have seen (e.g. health care reform), the Republican
Party, like all modern parties, are a coalition of disparate

It has been the legislative branch (the House of Representatives) that
uses the debt ceiling to extract concessions from the President, but this time,
it appears that the executive branch may threaten Congress with it.
Director of the Office of Management and Budget Mulvaney, one of the founders
of the Freedom Caucus (formerly known as the Tea Party) has been talking about
prioritizing debt servicing this week.  

In addition to the debt ceiling issue are
the spending authorization and the budget for the last several months of the
current fiscal year.  
  Under Obama, a formal agreement on the
budget proved elusive.  Instead, the
government ran on continuing resolutions.  Trump has proposed a budget for
the remainder of the fiscal year, which included $30 bln increase in security
(defense and homeland security), an $18 bln cut in non-defense spending, and
funding for the infamous wall on the border with Mexico.  

Trump’s proposals look to run into opposition in the Senate. 
Not only have several Republicans leaders rejected some of the cuts in
non-defense spending proposed by Trump, but many Democrats will not support
spending money on the wall.  The power to filibuster judicial nominees has
been gutted, but it is still a viable
parliamentary maneuver on other issues, including the budget.  

The takeaway point is that the monetary policy is on hold for at least
the next two months (June 14th FOMC meeting with updated forecasts and
confidence fans)
.  Fiscal policy moves to the fore.  There are
three major issues: the debt ceiling, the budget for the remainder of the
fiscal year, and spending authorization.   The markets seem fairly
relax over the prospects of new brinkmanship within the Republican Party,
between the executive and legislative branches, and/or
with the opposition Democrats.    With the Trump Administration
governing by executive orders, with the judicial branch blocking travel ban,
and disputes within the Republican Party blocking the legislative agenda, many
see the lower Treasury yields as at least in part a reflection of doubts about
the extent of the tax reform and infrastructure program being able to boost


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