Last night a debt-ceiling bill passed in the US House of Representatives and is expected to clear the Senate within the next day or two. Unsurprising, they have passed over 100 of these increases in the last 80 years.
More significant is the contractionary impact on the money supply. Over the past five months, the US government has paid bills by drawing down the Treasury General Account some $500 billion. Over the next seven months, they will need to sell an estimated $1.25 trillion in T-bills to replenish cash in the operating account and cover spending commitments. This will be about double the average T-bill issuance rate in the year’s second half. The T-bills that domestic buyers absorb (at the highest interest rates in 16 years) will extract cash from bank accounts and other riskier assets like corporate debt, stock markets and real estate.
The debt bill is also a fiscal contraction as it reduces federal government spending over each of the next two years.
No wonder US central bank officials are now floating talk of a rate “skip” at the June 14 announcement. Is skip the new pause? See, Fed prepares to skip the June rate rise but hike later.
It’s worth remembering that bear market lows have never materialized before the US Fed pauses (or skips, for that matter) but only after many months of cutting rates. In the 2008 recession, for example, the time from the Fed’s pause to the equity market low was 33 months (July 2006 pause to a March 2009 market low and -55% for the S&P 500). Before that, the pause happened in May 2000, with the market low in October 2002 (29 months and -42% later).
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