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The US Financial System at Risk

Last week's CPI release showed some level of pause or even a slight reversal from the falling trend. During the same week, Federal Reserve accounts were released that posted a $114 Bn loss in 2023. Even the short-term government funding that was passed recently is about to run out by Friday, though a new funding bill was released last night.

All these factors along with decades of high fiscal deficit and highest debt levels indicate to a fragile financial period ahead. Though short-term funding helps in delaying the problem given that it is an election year the political situations might bring in more risks than estimated.

The US banking sector results continue to rise the liquidity. But as the reverse repo continues to reduce the BTFP is about to end on 11th March 2024. The possibility of problems escalating from March to June 2024 is very high.

The biggest impact will be on rate trajectory, it CPI for the next release starts to gain momentum on reversal due to supply issues then the Federal Reserve might change its stance again towards a possible hike.

Any hint towards this action would shock the equity and bond markets resulting in a severe reaction in a short period. Thus, it becomes more important to look towards any such hints over the next couple of months.


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