U.S. Fiscal Forecast Weekly Update

Three events of this week deserve the highlight. 

First of all, the European Central Bank raised its three key interest rates again. This was the third increase in a row, and the second one at the 0.75 percent level. The ECB continues its monetary tightening, but it does so on the heels of rising market rates - not ahead of the curve as the Federal Reserve did. Nevertheless, this reinforces the trend upward on interest rates that started this spring; we can also expect the euro to strengthen vs. the dollar.

The second event worth of note is the announcement by the Fed that its M2 money supply continues to shrink. While money supply is still rising at an annual rate, the actual M2 outstanding has been declining for several months now. Tightened liquidity will be bad for for equity markets, but it is good for the sovereign-debt market.

Third, we saw a trend break in auction yields on the U.S. debt. After months of rising yields, every auction this week strongly hinted that yields are plateauing. Market yields pointed even more strongly in the same direction. This is possibly a break in the upward trend, but at the very least a welcome pause.

Last but not least, our model over the cost of the U.S. debt says that the average annualized cost currently is an estimated 1.98 percent of total debt. This is up from 1.87 percent on October 1, i.e., the beginning of the current fiscal year. We estimate that at this higher rate, the cost of the debt will be $300 billion higher for the entire fiscal year than at the 1.87-percent level. This estimate is contingent on the debt itself not increasing, and on interest rates not increasing further.

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We do not give investment advice. 

This blog provides analytical information solely for the purposes of 1) predicting the cost of the federal debt, and 2) for assessing the risk for a U.S. fiscal crisis. All information published here, forecasting and other, is based on publicly available data from the U.S. Treasury, including but not limited to approximately 65 percent of the current debt; on macroeconomic data, including but not limited to monetary policy decisions by the Federal Reserve; and on macroeconomic theory.