February 01, 2023
The monster week of economic news continues apace! Neil is heading over to the Federal Reserve shortly to cover the release of a policy statement at 2pm ET, and chair Jerome Powell's news conference at 2:30.
- Today, we look at the many ways the Fed will (uncomfortably) be in the middle if things go bad this summer in a debt ceiling standoff. Plus, new jobs data that point to surprising strength in the number of job openings.
Situational awareness: The Institute for Supply Management reported its manufacturing index fell for the fifth straight month to 47.4 (down from 48.4), below analyst expectations. Numbers below 50 indicate contraction.
Today's newsletter, edited by Javier E. David, is 679 words, a 2.5-minute read.
1 big thing: The Fed will be in the thick of the debt limit mess
When he takes questions from reporters this afternoon, the Fed chair will presumably talk at length about the outlook for inflation, employment, and Fed policy.
- But a different set of issues loom over the central bank that we suspect Powell would rather not talk about — potentially tough decisions that involve a debt ceiling standoff.
Why it matters: The debate itself is a fiscal issue between Congress and the executive branch. But if it turns into a crisis with a U.S. default or other extreme outcomes on the table, it would inevitably ensnare the Fed.
State of play: The Fed acts as the "fiscal agent" for the U.S. government, essentially serving the same role for the Treasury that a bank (like JPMorgan) might for a large corporation.
- The New York Fed operates Treasury debt auctions, so it would be in the middle if demand falters for U.S. government bonds, or if the government attempts to avoid breaching the debt limit through novel strategies to manipulate the face value of debt.
- The Fed also maintains the government's operating accounts; any attempt to prioritize payments — for example, making good on interest payments but delaying paying military contractors — would be a profound operational challenge.
- For now, the Biden administration is disinclined to exploit a legal loophole by minting large denomination platinum coins. But if it did, the Fed would have to decide whether to accept the deposit, and could face litigation regardless of its decision.
Then, there are the risks to financial markets and the economy if there is a technical default on bonds, which economists across partisan lines see as potentially catastrophic.
- The Fed would immediately face questions as to whether it should suspend quantitative tightening that is withdrawing liquidity from the Treasury market, or even start buying bonds again.
What they're saying: "While the Fed will be careful not to inject itself directly into what is ultimately a fiscal issue, we can also be sure that it won’t take the possible effect of a default on financial markets and the economy lightly," Piper Sandler's Roberto Perli and Benson Dunham wrote in a research note.
- "A default, even if brief, could have profound consequences, and most likely the Fed is exploring possible ways to mitigate the problem," they wrote.
The intrigue: There are unusually close ties between the individuals involved. Treasury Secretary Janet Yellen is a former Fed chair. Current Fed vice chair Lael Brainard may be heading to the White House imminently.
- And Powell was a Treasury undersecretary in the 1990s overseeing debt issuance. He came to public prominence with commentary on the debt ceiling standoff back in 2011.
The bottom line: The Fed doesn't like getting caught up in the middle of political disputes. But with the way things are going, it won't have much choice.
2. Job openings are on the upswing again
Fed officials have welcomed the steady decrease in job openings as a sign that hot demand for workers was cooling off.
- But that changed in the final month in 2022: Job openings soared by 572,000 to 11 million in December, according to the latest Job Openings and Labor Turnover Survey.
Why it matters: The labor market is still tight, with only modest signs of loosening up. Despite a steady stream of layoff announcements in the technology sector, there are still more job postings than workers available to fill them.
Overall, there were 1.5 million layoffs in December — slightly higher than the prior month's 1.4 million.
- But layoffs remain near historic lows. For instance, there were 1.8 million reductions in December 2019, a time when the labor market was considered quite healthy — and the most recent numbers are lower than that.
What to watch: New data from ADP points to a notable slowing in private sector hiring last month, adding just 106,000 jobs last month — far fewer than the estimated 190,000.
- Yes, but: ADP said the slowdown had less to do with factors that suggest a big shift in hiring patterns, and more to do with extreme weather last month that disrupted employment in sectors like construction.