STIR: Tariff Inflation Implications Outweigh Again, 60bp Of Fed Cuts For 2025

Late on 24 Feb reports suggested that leader of the centre-right Christian Democratic Union (CDU) and presumptive next chancellor Friedrich Merz could look to use the current Bundestag, rather than the new chamber elected on 23 Feb, to pass reform to the constitutional debt brake. Thorsten Frei, CDU leader in the Bundestag said to Deutschlandfunk "Very quick decisions are needed, quite specifically in security and foreign policy". Frei called the prospect of the swift establishment of a fund for Ukraine aid "feasible", but sought to argue that any wider constitutional changes would not be rushed. 

• On 25 Feb, figures from within the CDU and its Bavarian sister party the Christian Social Union (CSU) have warned against such a plan.
  • Hendrik Wüst, CDU Minister-President of Germany's most populous state North Rhine-Westphalia, said to Rheinische Post "The new federal government must first set priorities and scour the budget for savings potential," and that it should be assessed "what’s possible within the current debt brake and only then consider its reform."
  • CSU leader and Bavaria's Minister-President Markus Söder said to ARD that he is "somewhat cautious" about such a plan, "because you could ask, what’s the legitimacy for such a decision after the election has already taken place."
• Eventual negotiations over reform to the debt brake will prove lengthy, with the far-left progressive Die Linke confirming once again this morning it's opposition to reform in the cause of boosting defence spending. co-chair Ines Schwerdtner said to Bayern 2 earlier "We won’t loosen the debt brake to rearm, but only to invest in social infrastructure," 

Highlights from the Logan Q&A:

• "When I look at money markets today, and repo rates in particular, one of the ones that I've been paying particular attention to is Tri-Party [repo] relative to SOFR, because the Tri-Party rate doesn't incorporate this balance sheet costs that SOFR incorporates between banks and non banks. And when I want to think about the level of ampleness in the regime... I think that it's best to compare that to Tri-Party rate right now. Now, as money markets continue to evolve, those rates are going to change in the structure of those markets are going to change as well. And so... I think that's a useful way of framing how I'm thinking about those money market rates today. But... those constructions may change over time. I don't know that I have a policy goal to create a repo market that's inter-bank. I don't see that as a policy goal. I see the policy goal being creating an efficient and effective policy implementation framework where money market rates are close to IRB, and those money market rates reflect a variety of constructions of borrowing and lending with different bank and non bank participants, and in the US, the repo market, as you know, is is quite large and significant, with a lot of activity today... So for me, when I'm thinking about the policy goals, I think it is getting to an efficient, effective implementation framework with those rates being close to, but not exactly at, IORB just given the different segments."
• On overnight RRP facility: "I think it's worked quite smoothly and, and as we expected, so we haven't really seen a change in reserves... because all of it has generally come from the overnight RRP facility. So far, there's a little bit left remaining in that. I think that that makes sense given the configuration of where money market rates are right now. And it wouldn't surprise me if that started to go up a little bit, if the Treasury starts to bring down the TGA, some of that might show up in reserve. Some of it might show in the overnight RRP, going back up again and then coming down as Treasury restores that TGA balance. So to me, that's the overnight RRP working as designed and and being very effective at keeping that that lower floor on money market rates and so really, generally, as expected,"