The U.S. Government Influencing Rates

October 11, 2021

One of the main attention grabbers over the last few weeks was the looming government shutdown. How does it impact Orion’s brokers, and your clients? Will it be a yearly event, despite one party having the majority?

 

The U.S. government’s fiscal year came to a close as it does every year at the end of September. Congress managed to put off the hard decisions until December. This will buy almost two more months for Congress to pass a budget bill to fund the government for the remainder of the new fiscal year. The Senate finally reached an agreement last week to raise the federal debt ceiling, ensuring that the United States can pay its bills for the next few months.

 

While the shutdown was avoided, Congress did not pass a more permanent increase or suspension of the debt ceiling and Treasury Secretary Yellen noted that funds would be exhausted by October 18 if nothing is done although the Congressional Budget Office projected that would happen until early November.

 

If the debt ceiling isn’t raised, the Fed could blunt some of the worst impacts. The Federal Reserve’s Open Market Committee, it’s group for implementing Fed policy, could offer to buy unlimited amounts of defaulted Treasuries, preventing panic selling. The FOMC could similarly vote to sell some of its Treasury stock that is not in default. The Fed could allow banks to count defaulted Treasury securities towards their regulatory capital. It could also allow bank capital ratios to temporarily slip if huge cash demands materialize.

 

Orion believes that it is doubtful any of that will be called for. While the prospect of the United States defaulting on its debt creates sensational headlines, the U.S. has never defaulted on its debt and if it were to default, one could only speculate at the outcomes. The financial market fallout could be significant with a quick and severe tightening of liquidity as institutions take a wait and see approach. And no politician, regardless of party affiliation, wants to beknown as the person most responsible for an event that has never take place in the past.

 

We believe that as deadlines approach, Congress and the President will seek compromise in a prudent manner as we saw last week. And when that happens, mortgage rates will stabilize, helping your clients.


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