In comments on the market, daniel berkowitz , senior investment officer for investment manager Prudent Management Associates wrote:
We believe the debate about continued rate hikes is over. It's more likely the federal funds rate will breach 5% than remain under. Macroeconomic data is ultimately leading Fed policy, and we haven't seen enough from recent data prints that cause us to believe the Fed will change course now, particularly given the trajectory of the labor market.
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The FOMC has been throwing out projections that show a higher terminal rate than is currently factored into market prices, and we think the markets should take the fed at its word. We also expect hawkish sentiment will continue to be broadcast from the Fed over the next few months even if forthcoming data reflects an optimistic path forward for inflation. T
his is particularly important given that market rallies can loosen financial conditions, which ultimately makes the Fed's job tougher.
Raising The US Debt Ceiling
Also of note is the looming debate over raising the US debt ceiling above $31.4 trillion. The Treasury has initiated special procedures to allow the government to pay outstanding obligations and Secretary Yellen floated June 2023 as the ultimate date for when the US government may run out of cash.
It's been some time since 2011 when extreme political brinkmanship led Standard & Poor's to downgrade US debt from its triple-A rating, but it's not impossible for history to repeat itself. Certainly, our base case expectation is that politicians ultimately reach a compromise given the widely understood importance of Treasury bonds to the global financial system.
With that said, we've already gotten a taste of such brinkmanship during the process to nominate Speaker McCarthy, and this may presage a similarly contentious debate around the state of US fiscal policy.
To the extent forthcoming negotiations around the debt ceiling hit a series of major speed bumps, we expect US fiscal policy to inject further volatility into an already uncertain investment climate over the coming months.
About prudent management associates :
Prudent's core investment philosophy focuses on minimizing risk over time. As a result, the company does not react to market events, but rather considers them in a larger context to develop a long-term outlook for the development and maintenance of investment portfolios.