Solid signals the debt ceiling is going to be a problem, and might be a catalyst (not they catalyst) behind today's risk market selloff.
Yes, it eventually gets resolved but the fear it will be messy and chaotic this time around.
A thread to explain.
1/6
First, their is 1.3 trillion in Fed reverse repo (RRP). The Fed is offering 5 basis points in this RRP facility
Their is no reason for a T-Bill to have a yield above the 5 bps RRP rate.
2/6
Here is the bill curve out the next 9 mos and the Oct 18 date that the govt runs out of money.
The only bill yield yields above 5 bps is from Oct 19 to Oct 28.
By trading above the RRP rate after Oct 18 signals the debt ceiling is going to be a problem in this time period.
3/6
The betting markets have a contract with an Oct 15 date. It is essentially 50/50 it will be raised before this date.
This signals no early deal. So, even if a deal gets done in time to avoid a mess, it is going down to the wire.
4/6
Now for the political part to ask why this is happening.
The Ds are the majority of the House, Senate and Presidency. They do not need R votes.
But hiking the debt ceiling is deeply unpopular and they want cover from the Rs. They are not getting it.
5/6
Biden is deeply unpopular and it just gets worse everyday. See the orange line, new highs in "disapprove" regularly.
Does Biden lack the stature IN HIS OWN PARTY to cut a deal between his progressives and moderates? He would if he was at 55% appr.
6/6
Bonus
All the Wall Street strategists are in universal agreement this is a bunch of nothing and will get resolved without drama.
This last time they we this sure about something was Feb 2020 with they all concluded CV19 was temporary and not important.
You have been warned!
Can/should the Fed buy T-Bills and stop a mess with the debt ceiling?
Buying bills or any kind of "support" for the Treasury market is taking a side in an intensely political fight.
1/2
Powell is fond of saying that congress does the will of the American People. The Fed job is to respond, not take sides.
And for the Fed to get involved would be especially political given they all but signaled they are going to start tapering at the Nov 3rd FOMC meeting.
2/2
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The OMB Director and Acting CFPB Director @russvought laid out the charges of lying to Congress and mismanaging the renovation of the Fed (Eccles) building.
While the betting market still has Powell getting fired at less than 50%, it is now trending higher.
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The Federal Reserve Act says that a Fed Governor (including the Chair) may be removed “for cause by the President.”
However, “for cause” is not defined in the statute and has never been tested in court in this context.
I would argue "for cause" is not a disagreement over Monetary Policy ("too late" cutting rates), but can be lying to Congress and/or mismanaging the rules around renovating the Fed (Eccles) building?
Powell said this to the Senate Banking Committee on June 25, 2025, as part of the semiannual Monetary Policy Report to Congress.
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"Generally, I would just say we do take seriously our responsibility as stewards of the public’s money. ... There’s no VIP dining room. There’s no new marble—we took down the old marble, we’re putting it back up. We’ll have to use new marble where some of the old marble broke. But there’s no special elevators; there’s just old elevators that have been there. There are no new water features. There’s no beehives, and there’s no roof terrace gardens."
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Technically, Powell is correct because the renovation has not been completed. However, such details are outlined in some plans for the renovations.
Is this a big deal? No. However, if Trump is looking for ANY reason to remove Powell, this might be enough. And it might be enough "for cause" that the Supreme Court will uphold it.
Furthermore, no one in Congress wants to spend any political capital defending a $2.5 billion marble Washington, D.C. building with private elevators, beehives, and private roof terraces.
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Bottom line, Powell may have given Trump an opening to remove him. Will Trump take it?
Or, does Trump want/need "Too Late" Powell to stay as Fed Chairman until May 2026 to use as a punching bag?
Yesterday, Jim appeared on Bloomberg TV, warning that if the Fed cuts rates and the market thinks this is wrong, 10-year yields could surge through 5%.
(Perspective ... 10-year yields were last above 5% in October 2023 and as high as 4.85% in January).
🧵
2/8
President Trump disagrees with this thinking and believes the federal funds rate should be 1% right now.
From a "truth" posted on June 30.
3/8
If (or should I say when) Trump gets a Fed Chair to make 1% happen, how will the 10-year react?
Reminder of what happened last year to long rates when the Fed cuts rates (peach arrow) and the market does not think it's a good idea (cyan arrow).
I would argue that if the Fed cuts rates and you assume mortgage rates follow the federal funds rate lower (they may NOT be the case), home prices would rise, putting the monthly payment right back at $2,860.
Polymarket recession odds peaked at 65% on May 1st, the April ISM release date, suggesting Liberation Day and the 20% stock market correction did not damage the economy, as the "soft data" warned.
Subsequent April data confirmed this.
Will May see more of the same?
🧵
2/12
The prevailing narrative in the market for months has been that the labor market is going to fall apart, forcing the Fed to cut rates.
This has not happened, and so far, the "soft" (survey) data have been wildly off in predicting the economy.
3/12
ISM Employment upticked in May from April. The first monthly "May" data point suggests the labor market is still not weakening.