Rates on the rise
The 10-year U.S. Treasury yield has been on a steady climb upward since May but has accelerated to start the fourth quarter, reaching its highest level since 2007. This has pushed other key borrowing rates sharply upward as well.
The 30-year fixed mortgage rate is inching toward 8%. Equity markets, expectedly, have struggled. All three major indexes in the U.S. are down significantly over the last month.
Markets appear to be digesting the reality that rates are likely to stay higher for longer. The strength of the U.S. economy, which has not reacted to the Federal Reserve’s policy tightening as many expected, has led investors to revisit their assumptions about inflation’s persistence.
Energy prices’ rise in the second half of 2023 are similarly contributing to fears that the Fed’s inflation battle is far from over. Futures markets have pushed back their expectation of when the first rate cut will occur and forecasts for long-term equilibrium rates are drifting upward.
This aligns with the narrative the Fed has carefully spun. Projections released after September’s Federal Open Market Committee meeting show the median committee member expects the fed funds rate to remain above 5% through 2024, 0.5 point higher than June’s projections. Additionally, a few members raised their long-term projections for the fed funds
rate.
Shutdown averted…
In a surprising turn of events, Congress voted in the 11th hour to avert a government shutdown.
Unexpectedly gathering support from many Democrats, Republican House Speaker Kevin McCarthy sidestepped some of the House GOP’s main holdouts and passed a continuing resolution that keeps the government open through November 17, allowing more time for Congress to negotiate the full fiscal year spending bills.
To garner bipartisan support, McCarthy stripped funding for Ukraine out of the continuing resolution and included $16 billion for disaster relief. All in all, the stopgap is considered a “clean” temporary funding package that will for now stall a potentially politically and economically calamitous government shutdown.
After passing on the floor of the lower chamber, the stopgap measure flew relatively quickly through the Senate— and with only three hours to spare, it was lauded and signed by President Joe Biden.
…But now a Speaker-less house
However, after now-former House Speaker Kevin McCarthy reached across the aisle to prevent a shutdown, he was ousted from his position on Tuesday evening. This marks the first time in history that a speaker has been removed through the passage of a motion to vacate. In his stead, Rep. Patrick McHenry, a top McCarthy ally, will serve as speaker pro tempore until a new one is elected.
In the wake of this historic action, the GOP has scrambled to come up with viable candidates to replace McCarthy. No front-runner has emerged yet, though a number of names have been suggested, including former President Donald Trump. So far, only Jim Jordan and Steve Scalise have publicly expressed their intentions to run. After an eight-day recess, Republicans are set to reconvene on October 10 to hold a candidate forum.
This shake-up effectively puts Congress’ deliberations on the 12 appropriations bills on hold. McCarthy’s successor faces a bumpy road in getting them approved. Moreover, in the absence of an agreement by January 1, 1% across-theboard cuts to discretionary spending will go into effect.
This special provision in June’s Fiscal Responsibility Act presents an additional deadline to squeeze out a fiscal 2024 budget; Democrats do not want to see cuts to nondefense discretionary spending and the same is true for Republicans with regard to defense spending.