Fed Expected To Raise Interest Rate Despite Debt Ceiling Uncertainty

The AI stocks rallied yesterday as NVIDIA gained $184 billion in one day after its AI chip release. The US stock market seems to be sailing through the choppy waters relatively easier given the aggressive policy tightening by the US Federal Reserve and debt ceiling uncertainity. The recent rally might indicate another rate hike coming next month.

On the other hand, US lawmakers are yet to reach an agreement on lifting the debt ceiling given the political turmoil ahead of major Presidential elections. The Democrats are under pressure to accept a deal that they can boost over in campaigns and Republicans are not willing to give them the satisfaction, risking the lives of millions of people.

What to expect from the FOMC meeting next month?

As the US government approaches the deadline to lift the debt ceiling this week, futures markets are almost fully pricing another quarter point rate hike to the 5.25-5.50% range by the end of July. The market is expecting that the next rate hike will be the last one of this cycle. The Federal Open Market Committee will meet on 15 and 16th June and by then we will have a clear picture over the debt ceiling as well.

If by some chance the US government defaults on its debt and the US markets begin to collapse, we are more likely to see the FED pause or even decrease interest rates to allow easy borrowing to revive the market.

US Treasury remains under pressure in both scenarios

Uncertainties in the Treasury bill market did not witness much relief as one-month bill yields remained above 6% early Friday. Even if the debt ceiling is raised before June 1, the Treasury Department will have to rush to issue up to $1 trillion of new debt securities to meet short-term funding needs.