FOMC Minutes from the May 2-3 Meeting

May 24, 2023

The FOMC minutes, published this afternoon, reveal frustration that inflation continues to recede more slowly, pushes back against any consideration of a rate cut in 2023 or indication that the rate under no circumstances would be raised further in the second half of 2023. The mantra is that policy will be data driven, leaving most options in play. The economic outlook foresees mild and short-lived recession followed by modest recovery. Uncertainty remains considerable and includes the possibility of a U.S. government debt default. On that danger, the minutes say little beyond this: “Some participants also noted concerns that the statutory limit on federal debt might not
be raised in a timely manner, threatening significant disruptions to the financial system and tighter financial conditions that weaken the economy.”

The U.S. hasn’t defaulted before, although there have been a number of contentious congressional debates in the past that always ended with a decision that avoided a debt default. Based on what has happened when other countries have defaulted, the dollar’s central role in world trade and finance, and the leadership of the U.S. Treasury market, it’s hard to understate what the consequences of a U.S.¬† debt default might be. Personally, if the Louisiana Purchase in 1803, which extended American territory beyond the Mississippi River and doubled its size was the singular event that set the United States on a path that inevitably evolved into super-power status, a debt default 220 years later in 2023 could prove to be the beginning of an exit ramp from that highway.

Very soon, the latest credit ceiling crisis will likely cross over a line that impacts financial markets over an extended period, regardless of how such gets resolved. Financial  market strains from the speed of Fed tightening in 2022 and this year already are exerted an independent tightening effect on U.S. monetary conditions independent of the rise in rates, and Fed officials have already said that as the impact of the banking strains becomes quantifiable, such a drag may serve as a substitute avenue for how much further rates need to go up. That trade-off would draw even more attention if a default actually happens.

Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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