Federal Financing Needs Restrain Warsh

Federal financing pressures and the high reliance on leveraged hedge fund demand for Treasuries are forcing the Fed to maintain a cautious stance on rate hikes. Despite strong economic data, the fiscal necessity of keeping debt costs low and tax revenue high via equity markets constrains monetary policy.

Key Takeaways

• 1.The Fed, represented by Warsh, is constrained from aggressive rate hikes due to high federal financing needs and the sensitivity of equity markets and hedge fund repo-financed debt.
• 2.Hedge funds have become significant leveraged buyers of US Treasuries, making the market vulnerable to spikes in repo or funding rates.
• 3.Short-term disinflation caused by lower oil prices and a strong dollar provides temporary cover, but long-term fiscal deficits and debt growth pressure inflation upward.

Table of Contents

• Chart 1: Oil price round trip will pull down CPI and Core CPI...
• Chart 2: Financing costs “explode” if interest rates rise to reflect budget deficit
• Chart 3: Treasury debt growing faster than GDP, T-bills growing even faster
• Chart 4: Deficit losing the revenue boost from tariffs – bigger refundings to come
• Chart 5: Since 1982, net capital gains share of Adjusted Gross Income has been rising
• Chart 6: Debit balances / Free Credit Balances in Cash + Margin Accounts
• Chart 7: Hedge funds own a lot more UST, financed by repo

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