DEBT LIMIT
Kevin McCarthy and Joe Biden both indicated throughout the week that they were likely approaching a debt limit deal that could be voted on by June 1st, and markets seemed relieved at this progress. Then, on Friday, Republican negotiators walked out of the talks. At our press time, it is unclear if talks will resume today or over the weekend.
Our Take: The House Republicans may be able to extract some concessions from the administration, but they need to be careful not to overplay their hand. It is very likely that a sufficient number of Republicans would vote with Democrats to avoid a default, and this limits the Republican leadership’s leverage in negotiations.
FED SPEAK
It was a busy week for Fed speak with many members providing their perspective on a potential pause in rates at the Fed’s upcoming June meeting. Early in the week, Minneapolis Fed President Neel Kashkari called for further rate hikes noting the Fed has “more work to do to bring inflation down.” Dallas Fed President Lorie Logan said she does not think the evidence supports a pause in rate hikes yet, a view that is shared by Fed Governor Miki Bowman. Although not indicating he favors a pause or hike, Vice Chairman Philip Jefferson stated progress on inflation has been discouraging, noting that “disinflation in core goods prices is occurring at a slower pace than expected.” In contrast, Chicago Fed President Austan Goolsbee and Atlanta Fed President Raphael Bostic both indicated that a pause may be appropriate. Importantly, Fed Chairman Jerome Powell signaled he favors a pause stating the Fed has “come a long way in policy tightening and the stance of policy is restrictive” adding that the Fed “can afford to look at the data…and make careful assessments.”
Our Take: While the debate between a pause or continued rate hikes is far from settled, Powell’s comments, and his influence on the Fed, hint that the balance has shifted slightly in favor of a pause. What is clear is that the Fed remains highly attentive to inflation risks and is determined to get inflation under control.