Stone McCarthy: No More Hikes This Year, Debt Ceiling Can Derail Fed's Balance Sheet Plans

While most other sellside reports have toed the line that the Fed will announce a September balance sheet reduction, coupled with a rate hike in December, Stone McCarthy has turned more bearish on the US economy, and in a note released moments ago by Terry Sheehan, writes that "we continue to expect that the FOMC will announce the change in reinvestment policy at the September 19-20 meeting to start in October" but cautions that "this could be delayed if it looks like an increase to the debt limit is not immediately forthcoming, and with it the risks of the US default on its sovereign debt" and, more importantly, does not see any more rate hikes in 2017.

His note below, courtesy of Stone McCarthy:

  • Due to the disappointing inflation numbers, we do not look for another rate hike in 2017, and for only two in 2018.
  • As expected, FOMC maintained the fed funds rate target range at 1.00%-1.25%. Forward guidance still for "gradual increases" in rates, depending on data.
  • Balance sheet normalization to begin "relatively soon", but specific timing not announced. The wording would suggest a September announcement is on the table.
  • Little change in content of FOMC statement on jobs, inflation expectations. Language on inflation suggested slightly greater concern that lower readings will linger.
  • Labor market "continued to strengthen", activity moderate "so far this year".
  • Inflation measures "have declined" and "running below" the 2% objective, a small change the reflects more concern about a sustained inflation undershoot from the "running somewhat below" in the June 14 statement.
  • Inflation expected to "remain somewhat below" objective "in the near term, but to stabilize" over the medium term.
  • Near term risks "roughly balanced", "monitoring inflation developments closely".
  • At this writing we continue to expect that the FOMC will announce the change in reinvestment policy at the September 19-20 meeting to start in October. However, this could be delayed if it looks like an increase to the debt limit is not immediately forthcoming, and with it the risks of the US default on its sovereign debt.
  • Due to the disappointing inflation numbers, we do not look for another rate hike in 2017, and for only two in 2018.

Comments

Life of Illusion yogibear Wed, 07/26/2017 - 16:12 Permalink

 NEXT UP!CRISIS AFTER CRISIS........  https://ellenbrown.com/2017/07/23/saving-illinois-getting-more-bang-for… Posted on July 23, 2017 by Ellen BrownIllinois is teetering on bankruptcy and other states are not far behind, largely due to unfunded pension liabilities; but there are solutions. The Federal Reserve could do a round of “QE for Munis.” Quantitative Easing for MunisThere is a deep pocket that can fill the hole in the money supply – the Federal Reserve. The Fed  had no problem finding the money to bail out the profligate Wall Street banks following the banking crisis, with short-term loans totaling $26 trillion. It also freed up the banks’ balance sheets by buying $1.7 trillion in mortgage-backed securities with its “quantitative easing” tool. The Fed could do something similar for the local governments that were victims of the crisis. One of its dual mandates is to maintain full employment, and we are nowhere near that now, despite some biased figures that omit those who have dropped out of the workforce or have had to take low-paying or part-time jobs.The case for a “QE-Muni” was made in an October 2012 editorial in The New York Times titled “Getting More Bang for the Fed’s Buck” by Joseph Grundfest et al. The authors said Republicans and Democrats alike have been decrying the failure to stimulate the economy through needed infrastructure improvements, but shrinking tax revenues and limited debt service capacity have tied the hands of state and local governments. They observed:

In reply to by yogibear

Herdee Wed, 07/26/2017 - 15:06 Permalink

It goes along with the warning from Treasury. If they don't increase the debt limit there's not enough tax money coming in to even pay the bills. You bump up interest on it and you're fucked even more. They're bust from endless, useless wars because they supported terrorist groups. Payback's a bitch ain't it? American world hegemony until she all goes down, just like ancient Rome.

Clock Crasher Wed, 07/26/2017 - 15:10 Permalink

HAHA!Seven Trillion in off sheet unfunded liabilities coming due soon.Correction ONE HUNDRED AND sevenTrillion coming online...and counting....and if you believe John Williams from ShadowStats its backed by less than 10 trillion M3 money supply.God have mercy on us! 

Clock Crasher Wed, 07/26/2017 - 15:20 Permalink

"disappointing inflation"have you seen global CB balance sheet charts my dear?Bitcoin 3,000Price Line 2,000AMZN/GOOG 1,000Nasdaq 6,000 +Case ShillerNope... No inflation herebest look else whereGold: Bullish engulfing daily candle bitchez!

J J Pettigrew Clock Crasher Wed, 07/26/2017 - 15:46 Permalink

there is no inflation unless you want to buy something that people with money (long stocks) wants...a nice housecollege tuitiona nice cara nice vacation rooma place to live (see Vancouver, NYC, Toronto, London, etc)sand, dirt, still cheap.....and tvs production is becoming more efficient thus cheaper prices...that makes it deflationary...but of course you buy a tv about once every 7 years...

In reply to by Clock Crasher