Finally some Debt-Limit Drama, Powell paves the way for a pause

• Fed discord to grow as inflation shows signs of stickiness
• 10-year Treasury yield rises 2.1bps to 3.667%
• Wall Street eyes potential September rate cut

US stocks turned negative after key negotiators for Speaker Kevin McCarthy left a closed door debt ceiling meeting with White House representatives noting that they were not being “reasonable.” Finally, we are seeing posturing and some heated debate for this debt deal.  A big risk for debt-limit talks were that negotiations were too easy and that could have triggered an early vote which could have led to a similar reaction to the early vote on TARP that happened during the GFC. ​ Wall Street has seen this movie before and we needed to see some tension amongst negotiators, in order for a reasonable deal to be reached.

Wall Street thought we were going to see bill text over the weekend or early on Monday, with a potential vote in the middle of the week.  That seems less likely now and could raise the risk that we won’t get an agreement before June 1^st, the so-called X-date.

In addition to some debt ceiling drama, traders did not get to hear from a hawkish Fed Chair Powell. Speaking alongside former Fed Chair Bernanke, Powell noted that the Fed may not have to raise its policy rate as much as it would have to otherwise if tighter credit conditions weigh on growth. The Fed Chair appears content with signaling patience with regards to future tightening.  Powell has paved the way for the Fed to pause its rate hiking campaign at the June FOMC meeting.  The Fed could however resume tightening as Powell reiterated that inflation is far above the Fed’s objective. The Fed won’t have all the answers on whether inflation will continue to come down all the way to target for a few more months.  The risks of doing too much however are now becoming more balanced with the risks of doing too little.

Fed rate hike odds for the June meeting fell from around a one-in-three chance to less than 20%.

Yellen

CNN reported that Treasury Secretary Yellen told CEO’s from the big banks that more bank mergers may be needed as the industry manages this crisis.  The regional banks plunged after this reminder that the banking crisis is far from over.  Treasury Secretary Yellen is keeping her eyes on the banks and all the credit stress that is happening.  The regional banks are still vulnerable here and they are starting to drag down the bigger banks too.  The largest banks might not want anymore mergers, which could complicate how officials try to stabilize the banking sector.

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