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Yahoo
6 days ago
- Business
- Yahoo
Commentary: What America's default risk is costing you
For decades, investors thought the risk of the US government defaulting on its debt was essentially zero. It was nice while it lasted. There's still a low chance the US government will fail to pay principal or interest on nearly $30 trillion worth of Treasury securities circulating around the world. But global investors think US debt is getting riskier, and they also think US policymakers in Congress and the Trump administration are doing nothing about it. That rising risk is likely pushing interest costs higher for every American borrowing to finance a home, a car, or a business investment. A new paper published by the Federal Reserve Bank of Chicago uses an arcane security known as a credit default swap, or CDS, to estimate the risk of the US Treasury defaulting on a payment. The analysis highlights not just the damage caused by 15 years of political squabbling in Congress over budget issues but also the startling decline in market assessments of US creditworthiness. Congress may soon make this worse by passing a tax-cut bill that makes America's fiscal position even shakier. There are two basic market concerns with America's creditworthiness. One is the sheer amount of borrowing the US government must do to finance annual deficits that are now routinely close to $2 trillion. The total national debt is $36.2 trillion, and the amount of US debt in circulation now equals about 100% of GDP, a record for peacetime. That's only going higher. The other issue is the US debt ceiling, which puts a limit on the total amount of federal borrowing the Treasury is allowed to do. The debt limit itself isn't problematic. But Congress's handling of it is. Three times — in 2011, 2013, and 2023 — Congress has refused to raise the borrowing limit until the Treasury Department was dangerously close to running out of money. If the Treasury missed even a single payment it owed, it would constitute a default and roil the global trillion-dollar market for Treasury securities, the world's most widely traded assets. In January, the Treasury hit the debt limit once again. Since then, it has been relying on 'extraordinary measures' — basically, moving money around — to pay its bills. Congress must soon raise the debt limit once again, with the Treasury likely to run out of maneuvering room sometime between mid and late summer. Credit-default swaps are private contracts that work like an insurance policy, with one party agreeing to cover losses for a second party if the issuer of a given security defaults. The market for CDS contracts on government debt has been most active during debt crises in countries such as Argentina, Brazil, Mexico, Russia, Turkey, Greece, and Italy. The market for CDSs guaranteeing US debt is often dormant. But it springs to life around the time that the US debt ceiling needs to be raised, because Congress could trigger a default by waiting too long. The Chicago Fed research uses data on CDS pricing to estimate the market's perception of the risk of US default going back 14 years. In 2011, the United States came within a few days of default before Democrats and Republicans sparring in Congress agreed to raise the debt ceiling. That standoff led S&P to downgrade the US credit rating for the first time ever. The Chicago Fed paper estimates that the risk of default in 2011 peaked at more than than 6%. During debt-ceiling showdowns in 2013 and 2023, CDS pricing suggests the risk of default peaked at around 4%. CDS pricing today suggests the risk of a US default is around 1%. It's lower now than in prior standoffs because Republicans have unified control of Congress and don't need to negotiate with the opposition party to raise the borrowing limit. That 1% risk could also go higher as the Treasury comes closer to the "X date" when it runs out of money.A 1% risk of default might seem inconsequential. But it's not. 'Everyone says the US will never default,' David Kotok, co-founder of investing firm Cumberland Advisors, told Yahoo Finance. 'Somebody is saying, we don't believe you. The CDS market is saying the risk is greater than zero.' Kotok estimates that the higher perceived risk of default pushes the interest rate on a typical mortgage up by about three-tenths of a percentage point. That's because investors demand higher interest rates on riskier securities, such as the 10-year Treasury note, which is the benchmark for most interest rates paid on business and consumer loans. Read more: What is the 10-year Treasury note, and how does it affect your finances? On a 30-year mortgage for a median-priced house, lowering the interest rate by three-tenths of a point would lower the monthly payment by about $66. That's $792 per year or $23,769 over the course of the loan. Not a fortune, maybe, but shrewd investors welcome every marginal gain. Congress could eliminate the debt limit altogether by repealing the 1917 law that was supposed to simplify government borrowing, rather than creating a default mechanism. Back then, the executive branch needed congressional approval for every unique instance of borrowing. The debt limit was supposed to let the Treasury borrow freely up to a certain limit. That worked more or less as intended until 2011, when Republicans, who controlled the House of Representatives, used the debt ceiling as leverage to negotiate spending cuts with Democrats, who controlled the Senate and the White House. Repealing the debt limit might wipe out the market for credit default swaps on US debt, since debt limit deadlines are the very thing creating the default risk. Nobody would complain about that. Kotok estimates that the 30-basis-point premium on US interest rates would disappear. Then the US government would only face one debt problem: the vast amount of it. Markets have been jeering the mushrooming national debt this year, with investors showing unprecedented reluctance to buy some US assets. That has been another factor pushing US interest rates higher, when in normal market action, they'd be holding steady or falling. JPMorgan Chase (JPM) CEO Jamie Dimon is the latest voice of alarm on the US debt, warning that a 'crack' in the bond market could signal coming market turmoil. That would most likely occur as more investors shunned US assets, including Treasurys, sending rates even higher. Treasury Secretary Scott Bessent says Dimon is overreacting, giving cover to Republicans working up the big tax-cut bill that could add another $3 trillion or $4 trillion to the national debt. Moody's downgraded US debt for the first time in May following Fitch's first-ever downgrade in 2023. Like S&P in 2011, both rating agencies cited political dysfunction and huge annual deficits. The rumble of discontent with America's fiscal recklessness is growing louder. Eventually, they'll start to hear it in Washington, D.C. Rick Newman is a senior columnist for Yahoo Finance. Follow him on Bluesky and X: @rickjnewman. Click here for political news related to business and money policies that will shape tomorrow's stock prices.
Yahoo
6 days ago
- Business
- Yahoo
Fed's Goolsbee: Need to Wait and See on Inflation Impact of Tariffs
Federal Reserve Bank of Chicago President Austan Goolsbee discussed inflation nearing the central bank's 2% target and the potential inflation impact of trade tariffs Tuesday at the Corridor Business Journal Mid-Year Economic Review in Cedar Rapids, Iowa. Sign in to access your portfolio
Yahoo
02-06-2025
- Business
- Yahoo
Chicago Fed president says ‘six-pack' economy hiding under layer of uncertainty
Federal Reserve Bank of Chicago President Austan Goolsbee speaks during the third day of the Mackinac Policy Conference at the Grand Hotel on Mackinac Island, Mich., on May 29, 2025. (Photo by Andrew Roth/Michigan Advance) MACKINAC ISLAND – The president of the Federal Reserve Bank of Chicago says that while the United States may be heading towards stagflation, there is still a strong economy hidden underneath a layer of uncertainty. Austan Goolsbee, speaking at last week's Mackinac Policy Conference, pointed to low unemployment rates and inflation hitting targets to suggest that rates should be 'well below where they are today' within the next few years. But he said that's at risk due to the uncertainty caused by constantly shifting federal economic policies, like President Donald Trump's will-he-won't-he approach to tariffs – which he said Michigan is the most exposed state to in the country. 'If we can get the dust out of the air, I do still think that underneath there is a strong dual mandate economy,' Goolsbee said, referring to the Fed's responsibilities to stabilize prices and maximize employment. 'The longer we go contemplating really big changes, like some of the ones that have been discussed, the more that fades into the background.' SUBSCRIBE: GET THE MORNING HEADLINES DELIVERED TO YOUR INBOX Goolsbee compared it to when he started going to the gym and asked his trainer how long it would take for him to develop a six-pack. 'Everyone has a six-pack underneath. The problem is not the lifting of weights; it's you've got to get all of what's on top of there off before you can see it,' Goolsbee said. 'And I feel a bit like that on the economy, you know, if we can just get this off of there, there's a six pack.' While Goolsbee said that the economy is currently heading in the direction of stagflation – with inflation rising at the same time employment is deteriorating – he said it will likely not be anywhere near as dramatic as the stagflation of the 1970s, when inflation was at 13% with an 8% unemployment rate. But he said any decision the Fed has to make can have a large impact on people's lives. 'What the Fed decides affects regular people. It is not just a game to be played out in the stock market,' Goolsbee said. 'It affects construction, it affects purchasing cars, it affects whether you can buy a house.' Ultimately, he said that while it would be easier to make those decisions with more stability, he said the Fed will adapt to whatever conditions they are presented with. 'I always say that our model at the Fed is the same as the Midwest, that there's no bad weather, only bad clothing,' Goolsbee said. 'You tell me what the conditions are, and I'll tell you what jackets you're supposed to wear.'
Yahoo
14-05-2025
- Business
- Yahoo
Fed's Goolsbee calls inflation report 'comforting' but says tariff effects 'are coming'
A Federal Reserve official says he's encouraged by Tuesday's better-than-expected inflation report but, all things equal, needs to see 'a lot' more like it before he would seriously consider supporting further interest rate cuts. 'It's a benign report,' Austan Goolsbee, president of the Federal Reserve Bank of Chicago and a voting member of the Fed's rate-setting committee, told USA TODAY on May 13. 'That's comforting.' The April inflation reading, combined with the 90-day pause on the highest tariffs on Chinese imports that President Donald Trump's administration announced Monday, paint a potentially brighter inflation outlook that could allow officials to resume rate cuts, Goolsbee said. At the same time, he added, 'When you have things that you know are coming down the pipe, we've just got to be more wary.' Goolsbee's comments are noteworthy because he's generally considered one of the more 'dovish' members of the Fed's rate-setting committee. That means he may be more inclined than others to reduce rates to head off a recession than raise rates or keep them higher for longer to bring down inflation. The Fed next meets June 17 through June 18. Last month, annual inflation dropped from 2.4% to 2.3%. the lowest in more than four years and moderately above the Fed's 2% goal, the Labor Department's consumer price index revealed May 13. Goolsbee said he didn't see an impact from tariffs – which gradually took effect from February to April – in the inflation numbers. Meanwhile, earlier in the week, Treasury Secretary Scott Bessent said the U.S. agreed to lower the 145% tariff on Chinese imports to 30% while China said it would cut its duties on U.S. shipments from 125% to 10% while the two sides continue to negotiate. Assuming those fees are sustained, it would reduce the average U.S. tariff rate from about 24% to 13% and cut projected U.S. inflation by year's end from about 4% to 3.5%, economists said. That would still be well above current inflation and the Fed's target. Noting that imports comprise about 11% of America's economy, Goolsbee said, 'If you can keep it in its lane, the impact of tariffs on the macroeconomy might not be that large.' If the lower tariffs are kept, the impact on inflation 'would not be nearly as big,' but 'it's not like we're going to just go back to what we had before… If you get above 10% (in the tariff rate), it can still be big.' 'There's a lot of dust in the air," Goolsbee added, referring to the import fees that many economists say will start to notably affect inflation readings in July and grow in following months. 'If we can get the dust out of the air, I think there's a path' for interest rates to 'keep coming down,' he said. The central bank cut its key short-term rate by a percentage point late last year as a pandemic-related inflation surge eased but has since paused as officials wait to see how President Donald Trump's levies affect consumer prices. Goolsbee's remarks suggest he's encouraged by the trade truce with China, a separate 90-day pause on double-digit tariffs on other nations, and soft inflation readings for both March and April. But the effects of the tariffs are uncertain and officials could remain in wait-and-see mode for at least several months. 'If we get several more (inflation) reports like we're seeing now…to me that's getting the dust out of the air' so the Fed can envision a path for resuming its rate decreases, Goolsbee said. At another point, he said, 'It's got to be a lot of reports.' 'We just have a lot of question marks,' Goolsbee added. 'What is going to happen to inflation?' The Fed, he said, will also closely watch what happens on July 2 when the 90-day pause ends for the tariffs imposed on dozens of nations. The U.S. is negotiating with many of those countries, Bessent has said. Goolsbee did not say when he thinks Fed officials could resume their market-friendly rate cuts. Fed fund futures markets this week pushed their estimate of the first decrease from July to September. Fed officials, he acknowledged, will need to balance the effects of inflation with an economy and job market that's also expected to weaken because of the import taxes. Fed Chair Jerome Powell has said tariffs have put the Fed's mandates of stable prices and full employment 'in tension.' If the job market "is deteriorating' in the next month or two, before the effects of tariffs on inflation become clear, 'That's a hard circumstance,' Goolsbee said. As it weighs a possible rate cut, he said, the Fed likely would try to assess whether the inflation rise from tariffs represents a one-time increase or a shock that could ripple through the economy because of an increase in consumers' inflation expectations, among other issues. This article originally appeared on USA TODAY: Fed's Goolsbee calls inflation report 'benign,' needs several more Sign in to access your portfolio
Yahoo
13-05-2025
- Business
- Yahoo
Fed's Goolsbee calls inflation report 'comforting' but says tariff effects 'are coming'
A Federal Reserve official says he's encouraged by Tuesday's better-than-expected inflation report but, all things equal, needs to see 'a lot' more like it before he would seriously consider supporting further interest rate cuts. 'It's a benign report,' Austan Goolsbee, president of the Federal Reserve Bank of Chicago and a voting member of the Fed's rate-setting committee, told USA TODAY on May 13. 'That's comforting.' The April inflation reading, combined with the 90-day pause on the highest tariffs on Chinese imports that President Donald Trump's administration announced Monday, paint a potentially brighter inflation outlook that could allow officials to resume rate cuts, Goolsbee said. At the same time, he added, 'When you have things that you know are coming down the pipe, we've just got to be more wary.' Goolsbee's comments are noteworthy because he's generally considered one of the more 'dovish' members of the Fed's rate-setting committee. That means he may be more inclined than others to reduce rates to head off a recession than raise rates or keep them higher for longer to bring down inflation. The Fed next meets June 17 through June 18. Last month, annual inflation dropped from 2.4% to 2.3%. the lowest in more than four years and moderately above the Fed's 2% goal, the Labor Department's consumer price index revealed May 13. Goolsbee said he didn't see an impact from tariffs – which gradually took effect from February to April – in the inflation numbers. Meanwhile, earlier in the week, Treasury Secretary Scott Bessent said the U.S. agreed to lower the 145% tariff on Chinese imports to 30% while China said it would cut its duties on U.S. shipments from 125% to 10% while the two sides continue to negotiate. Assuming those fees are sustained, it would reduce the average U.S. tariff rate from about 24% to 13% and cut projected U.S. inflation by year's end from about 4% to 3.5%, economists said. That would still be well above current inflation and the Fed's target. Noting that imports comprise about 11% of America's economy, Goolsbee said, 'If you can keep it in its lane, the impact of tariffs on the macroeconomy might not be that large.' If the lower tariffs are kept, the impact on inflation 'would not be nearly as big,' but 'it's not like we're going to just go back to what we had before… If you get above 10% (in the tariff rate), it can still be big.' 'There's a lot of dust in the air," Goolsbee added, referring to the import fees that many economists say will start to notably affect inflation readings in July and grow in following months. 'If we can get the dust out of the air, I think there's a path' for interest rates to 'keep coming down,' he said. The central bank cut its key short-term rate by a percentage point late last year as a pandemic-related inflation surge eased but has since paused as officials wait to see how President Donald Trump's levies affect consumer prices. Goolsbee's remarks suggest he's encouraged by the trade truce with China, a separate 90-day pause on double-digit tariffs on other nations, and soft inflation readings for both March and April. But the effects of the tariffs are uncertain and officials could remain in wait-and-see mode for at least several months. 'If we get several more (inflation) reports like we're seeing now…to me that's getting the dust out of the air' so the Fed can envision a path for resuming its rate decreases, Goolsbee said. At another point, he said, 'It's got to be a lot of reports.' 'We just have a lot of question marks,' Goolsbee added. 'What is going to happen to inflation?' The Fed, he said, will also closely watch what happens on July 2 when the 90-day pause ends for the tariffs imposed on dozens of nations. The U.S. is negotiating with many of those countries, Bessent has said. Goolsbee did not say when he thinks Fed officials could resume their market-friendly rate cuts. Fed fund futures markets this week pushed their estimate of the first decrease from July to September. Fed officials, he acknowledged, will need to balance the effects of inflation with an economy and job market that's also expected to weaken because of the import taxes. Fed Chair Jerome Powell has said tariffs have put the Fed's mandates of stable prices and full employment 'in tension.' If the job market "is deteriorating' in the next month or two, before the effects of tariffs on inflation become clear, 'That's a hard circumstance,' Goolsbee said. As it weighs a possible rate cut, he said, the Fed likely would try to assess whether the inflation rise from tariffs represents a one-time increase or a shock that could ripple through the economy because of an increase in consumers' inflation expectations, among other issues. This article originally appeared on USA TODAY: Fed's Goolsbee calls inflation report 'benign,' needs several more Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
