The two biggest threats to the U.S. economy and financial markets in 2023 are the Fed tightening beyond what is required to bring inflation back to its 2% target rate and a possible U.S. Treasury debt default if Congress fails to raise or suspend the “debt limit.”
- The Fed remains concerned financial market easing is impeding its ability to bring the inflation rate back to 2%, causing the Fed to use its “higher for longer” forward guidance. So far markets are not buying the Fed’s rhetoric and markets are up 1.5% YTD.
- The Fed is still forecasting a soft landing: 2023 GDP growth at 0.5%, inflation at 3.5% and no rate cuts. Private forecasters see slightly negative GDP growth, inflation at 2.2% by year end and Fed rate cuts in the second half of 2023.
- Historically, stock markets don’t bottom until the Fed stops raising rates and the recession begins, both of which could happen in April.
The debt ceiling is a limit on how much the U.S. Government can borrow to pay for what the Congress has already spent. Without it being raised, the Treasury eventually would default on its outstanding debt which would have negative, material and long-lasting consequences for the U.S. economy and financial markets.
- Ultimately the debt ceiling will be raised, suspended or terminated, but what is different this time is the uncertainty of the Congress being willing or able to take timely action to avoid a U.S. Treasury debt default.
- If a default occurs, the consequences could be severe: it likely would cause interest rates to rise further, financial markets to fall and tip the economy into a recession, with higher unemployment. It makes every current challenge to the economy and financial markets bigger and more costly.
China’s changing its zero-Covid policies is part of a pragmatic shift to growth to meet public expectations of growing the economy and incomes. The results have come more quickly and successfully than expected, making China an engine to help keep the global economy out of a recession.
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