We already have the answer. The Treasury buyback program is assessed as modest and relatively small given the $40 trillion size of the debt. The idea has been to primarily influence rates downward especially on the long end. But there are many other pressing factors that continue to drive rates higher simultaneously.
Inflation has remained stubbornly high. Given the reescalation of the war with Iran and the resultant effect on the price of oil, it is rather doubtful that oil will decline in the near term. We are living with the uncertainty of not being able to see any end in sight. Oil may just stay over $100 per barrel until there are either serious negotiations or some level of unthinkable decimation takes place for which neither side will benefit from.
Now that the ten-year is over 4.9% and mortgage rates have leaped over 7% there is every reason to believe there will be even more of a slowdown in housing construction. Commercial activity may follow. What is more concerning is that all of the associated suppliers and services will also be affected. On the retail side, furniture and household goods are beginning to show signs of slowing.
Many pundits have been evaluating the signs and are making various judgments about what action the Fed will take next week. I am in the camp of at least a 25-basis point tightening. But we also know from experience that one tightening does not usually stand on its own. Yes, the midterms are rapidly approaching. But the Fed still needs to pursue what they think is the best course of action for the future.
In the meantime, the economy continues to perform reasonably well. Do citizens really need a $5,000 handout if Republicans prevail. The proposed debt to finance such a policy would just be added to the existing debt. A level over $41 trillion would just be around the corner and would run counter to other efforts being made to attempt to reverse course on growing the debt.
Congress needs to take some action after the midterms to address the debt and to consider actions to extend the lives of the Social Security and Medicare programs. The 2032 deficit for Medicare looms large. But many legislators will not care because they will not be in office. The mode of management by crisis will be triggered once again.
Municipal Matters
Municipal issuance continues to run a pace, having already achieved just about $400 billion with months remaining. Many of the present transactions coming onto the market have been scheduled for some time. We have not seen any slowing in the market or postponements due to the back-off in the market due to higher rates. It behooves us to continue to monitor the market in this regard.
The tax exemption has once again been added to the list of potential targets to help balance the federal budget. We have been here multiple times before. We fully expect and appreciate that the municipal lobbying machine will once again go into high gear. No matter how many times it is explained it is not immediately apparent that state and local tax levels would be affected without tax exemption. But this administration has been keen on shifting some expenses back to the states. Medicaid and FEMA spending and grants are just two examples. It is easy to dismiss such potential action in the near term. However, if there are any signs that the elimination of the tax exemption is taking on support, the municipal market would be jarred out of any complacency.
In much the same way, it would be helpful to have more direction from the Fed. The probability of any guidance forthcoming is zero.
We remember 09/11 with great sadness for the fallen and for all those whose lives have been changed for all time. I was there. We should never see such a day again.
John Hallacy
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