By: Russ Kamp, Managing Director, Ryan ALM, Inc.

Like Chicken Little, many in our industry believe that the sky is about to fall on top of us as a result of the abundant US debt financing. It is expected that record levels of Treasury debt will need to be “purchased” and refinanced at increasingly higher levels of interest. As a result, we’ve recently learned that Moody’s has placed a negative watch on Treasuries. It follows on the heels of the action taken by Fitch in August (AA+).

Given all of the noise surrounding current and future Treasury auctions, investors are worrying that we have borrowed too much. However, I’m reminded by my former colleague, Charles DuBois, who referenced Paul Sheard, former Chief Economist at S&P, who put the issue in its proper framework. According to Charles, Paul supposedly stated that the issue is not “have we borrowed too much?” But rather “have we created too much purchasing power?”.

This is a major issue facing the US Federal Reserve at this time as they consider their next move in this rate cycle. It is also an issue that doesn’t get nearly the attention that it deserves. Not surprisingly, the investment community celebrated a CPI reading today that came in light, but they need to understand that the stimulus currently being put into the economy through record deficit spending may offset recent gains made through the FOMC’s rate action. Prolonged wars on two fronts might just lead to further deficit spending and greater inflation. In that scenario, the Fed will have great difficulty meeting the investment community’s collective expectation of falling, and in some cases, dramatically falling rates in 2024.

There isn’t a lot of slack in our economy at this time. If the government continues to maintain this level of stimulus, GDP growth is going to have to shrink in a meaningful way. But is that happening? According to the Atlanta Fed’s GDPNow model, we should expect annualized real GDP growth of 2.1% for Q4’23. That doesn’t indicate substantial weakness. For today we will celebrate a CPI that is closing in on the Fed’s 2% target. But it remains too early for victory to be declared.