“The nine most terrifying words in the English language are ‘I’m from the government and I’m here to help.’” - Ronald Reagan
Last week's market recap:
- The S&P 500 closed the week down -.78%. Year-to-date the index is up 8.33%
- NASDAQ closed the week up .09%. YTD the index is up 17.22%
- U.S. Aggregate Bond index was down -.05% for the week. YTD the index is up 3.53%
- 10-Year Treasury Rate stayed flat, ending the week at 3.44% flat from 3.44% the prior week.
- Fed Funds Target rate is currently 5.00-5.25%
- The 1-Year Treasury is yielding 4.82%
- A 6 Month Treasury is yielding 5.10%
The week ahead:
- CPI – Inflation Data
- Earnings: Disney, Toyota, Paypal, Devon Energy, etc.
What is the Fed Funds Rate?
Last week, the Fed raised the Fed Funds rate to a range of 5.00-5.25%. Many expect this to be the last rate hike of this cycle. For now, the Fed will likely pause on additional rate hikes. The Futures market is pricing in rate cuts as soon as September. Fed Chair Jerome Powell continues to push back on the idea of rates cuts coming soon. Either the Fed is wrong or the Futures market is wrong. Another potential scenario is rate cuts get pushed out farther than expected.
If we get rate cuts in 2023, that would mean the economy isn’t doing well and it needs the Fed’s support. We don’t want rate cuts in 2023.
Source: Atlanta Fed - https://www.atlantafed.org/cenfis/market-probability-tracker
What will happen with the Debt Ceiling?
The government is approaching its spending limit. Negotiations are underway in Congress to raise the limit. Politicians from both sides of the isle will probably be willing to push the issue down to the wire for political advantage. In an attempt to keep this simple, there are probably three scenarios of how the debt ceiling plays out:
- Most likely: The debt ceiling is increased ahead of the potential default date.
- We go through the default date without a ceiling increase, but the Treasury continues to make interest payments to avoid a technical default. This would cause a big hit to global financial markets and economic activity.
- Least likely: The U.S. defaults. Obviously, this would be the worst case scenario. Volatility would probably spike. The “risk-free rate” would be a term written in history books.
How many time has the debt ceiling been raised?
The debt ceiling has been raised over 100 times. It has been raised 78 times since 1960. Debt ceiling drama is common. Most investors should remain diversified through these episodes.
What are I Bonds paying?
The semiannual (1/2 year) inflation rate is 1.69%. If you buy the I bonds issued from May 2023 through October of 2023, you would also receive a Fixed Rate of .9%. Most bonds I Bonds purchased before 2023 don’t offer a Fixed Rate. Right now, you can earn significantly more yield in T-Bills!
As always, let us know if you have any questions.
CRA Investment Committee
Matt Reynolds CPA, CFP®
Tom Reynolds, CPA
Robert T. Martin, CFA, CFP®
Gordon Shearer Jr., CFP®
Jeff Hilliard, CFP®, CRPC®
Joe McCaffrey, CFP®
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