Macro Overview

The rating on U.S. government debt was cut from AAA to AA+ by Fitch, one of the three major credit rating agencies. Standard & Poor’s, another primary rating agency, cut its rating on U.S. government debt to AA+ in 2011, which was the first ever downgrade below AAA. Fitch’s reasoning for the downgrade includes a growing federal debt burden, fiscal deterioration, political gridlock, and eroding governance.

Lower credit ratings make it more costly for the U.S. government to borrow money and issue debt, indirectly raising bond yields on U.S. Treasuries. The recent rise in rates has increased the amount of interest that the government pays, increasing from roughly $520 billion quarterly in 2020 to over $900 billion quarterly in 2023.

U.S. banks are also coming under closer scrutiny by rating agencies as their exposure to commercial real estate loans continues to evolve as a concern. Rising rates on commercial real estate loans along with weaker demand for office and industrial space have intensified the risk of defaults and liquidity constraints.

Inflation and the U.S. dollar trended lower in July as evolving economic conditions altered the dynamics of consumer prices and sentiment. Inflation stood at 3 percent in July, the lowest in two years.

Small businesses have seen an increase in bankruptcy filings in 2023, an indicator to analysts of probable slowing economic conditions. According to the Small Business Administration, there are 33.2 million small businesses in America, which account for approximately 99% of all U.S. firms.

Atlanta Federal Reserve Bank President Raphael Bostic said that there is a risk of over-tightening of rates by the Fed. Financial markets are concerned that the Fed may have continued to raise rates to the point that it may have become counterproductive.

A weakening U.S. dollar is becoming an inflationary concern for consumers and the Fed. A weak dollar is inflationary because a weaker dollar makes imported goods more expensive for consumers, lowering their purchasing power. This is because the U.S. heavily relies on imported goods, such as clothing, autos, phones, computers, and televisions.
The month of July was Earth’s hottest on record, according to data from the Copernicus Climate Change Service, a European Union-funded scientific agency. July’s temperatures surpassed the global monthly average temperature record set in July 2019. Warmer temperatures increase the use of electricity and energy nationwide.

Sources: Bloomberg, Federal Reserve Bank of Atlanta, Fitch, Bureau of Labor Statistics, Standard & Poor’s, Copernicus Climate Change Service Macro Overview

Congress passed legislation during last-minute negotiations to avert a default on the nation’s debt. The suspension on the U.S. government’s $31.4 trillion debt ceiling is temporary until lawmakers finalize legislation to fund ongoing federal obligations.

The impasse on the debt ceiling added strain to bond and equity markets in May. Treasury bond yields rose as increasing debt level concerns triggered increased trading in government bonds. Debt ceiling concerns in addition to the uncertainty surrounding regional banks’ exposure to commercial real estate contributed to a volatile environment throughout the month.

The Treasury Department plans to issue additional short-term debt to fund immediate federal expenses, with $61 billion in 6-month bills and $68 billion in three-month bills already issued as of the first of June. Treasury issuances, also known as auctions, are part of the government’s ongoing cash management process.

The 49th summit of the G7 was held in Hiroshima, Japan in late May. The G7, which includes leaders from developed countries, gathered to discuss the Russian invasion of Ukraine, the climate crisis, the pandemic, and global geopolitical tensions. The G7 also conveyed concern surrounding China’s economic coercion and its stance on Taiwan.

The Fed’s most recent Beige Book survey found that demand for domestic transportation services such as trucking and railroad has been decreasing. The survey also found that commercial construction and real estate activity has also been decreasing overall. (Sources: U.S. Congress, Treasury Dept., G7, Federal Reserve)

Supreme Court strikes down Biden Student Loan Forgiveness Plan

Today, in a 6-3 decision, the Supreme Court struck down the Biden administion’s effort to cancel more than 40 million student loans for up to $20,000 each.  The total cost of the program was expected to be $400 Billion.

The three dissenting votes came from Sotomayor, Kagan and Brown Jackson.  The majority sited the reason for their decision being that the HEROES ACT does not grant a president the authority to cancel loan payments.  Constitutionally, that authority rests with Congress alone.  A president may cut or delay payments, but according to this decision, HEROES does not give him the authority to cancel payments.

From an Economic Perspective

A subsidy of this caliber would have exacerbated inflation and slowed the economy further than the Fed’s rate increases promise to do.  We have not yet begun to see the real consequences of the Fed’s actions, since it takes about 18 months for the full impact of each Fed rate action to show in the economy and we only started in March of last year!  It will further harm the lenders since the government won’t be funding the program with newly printed dollars.  Many will be unable to make payments because they have no job or low paying part-time jobs.  Then there are those who have chosen not to work and have simply fall off the grid of job seekers.

Advice to Borrowers

Of course, all the major news outlets covered this decision, but I particularly found the article in The Hill helpful.  To paraphrase…

1)  Know your loan – access it on line.   Some borrowers have graduated curing this pandemic pause and have never checked their accounts
2)  Call your loan servicer with any questions.  Keep in mind that they are low on staff and funding …so call sooner than later!
3)  Be watchful.  Have your payments changed?  The Biden administriation is still pushing for income-driven changes that have not yet been challenged legally.
Like…
No payment below a certain income threshhold or
Cutting undergrad’s payments.

Regardless of any legal challenges, at this time interest on paused loans will begin to accrue again on September 1 and payment requirements will re-start on October 1, 2023.