LARRY KUDLOW: This would be a death sentence for the entire economy

Now is the time to stop tightening Fed monetary policy and instead start tackling federal budget policy, which is still out of control. Joe Biden keeps telling us that he cut the budget deficit by $1.7 trillion, whereupon he was awarded a "Bottomless Pinocchio" by Washington Post fact-checker Glenn Kessler.  Sorry, Mr. Biden. 

The Congressional Budget Office just came out with a $1.5 trillion increase in the budget deficit for FY '23. Spending is running $400 billion above last year, and the final deficit this year is likely to come in around $2 trillion.  If you want to pave the way for lower inflation and stronger economic growth, the spotlight should turn from the Fed to the federal government.   

The accompanying chart drawn by the Committee to Unleash Prosperity Hotline shows how much M2 growth has plunged in the last two years. And although the relationship with inflation is far from perfect, it does strongly suggest inflation will continue to come down. Consistent with that, the treasury yield curve is upside-down and commodity prices continue to weaken.  

The latest reading for the CPI was 4.9%, still too high, but much better than 9.1%. The producer price index came in at 2.3%, and that could be where the CPI is heading and year-to-year import prices have fallen 4.8%. Now it's time for the Fed to pause and for Congress to get moving on spending restraint.   

SCHUMER DIRECTS DEMOCRATS TO ENSURE VOTERS ARE FRIGHTENED OF A DEBT DEFAULT 

One of the things I really like about Kevin McCarthy's debt ceiling and budget reform plan is that it not only lowers the speed limit on federal spending growth, it also has two important supply-side economic growth policies.   

One of them is the permitting reform bill called H.R. 1, which will lower the cost of all sources of power and create a lot of new jobs. The second is the work requirement provision that would increase labor force participation – that's good for growth, and also create taxable income from new labor entrants, as well as reduce welfare spending.     

If inflation is defined as too much money chasing too few goods, the McCarthy plan would be the first policy in several years to produce more goods and services, while the Fed has reduced supply of money. Hence, inflation will fall more because of supply-side reforms.   

By the way, putting a speed limit on spending would also stop the incredible Biden proliferation of regulations that is strangling energy and business throughout the economy. Then, there is the absolute insanity of the newly proposed EPA rule that would be the death sentence for fossil-fuel power plants. This would be a death sentence for the entire economy.   

These radicals at the EPA will wind up cutting power by 50% according to some estimates. We don't even have the technologies they want and hopefully, the whole thing will be unconstitutional.   

That's the kind of supply-side crack-up the Biden central planners have fostered for two years and that is a key cause of inflation. I don't really think the debt ceiling "X-date" is a big factor for financial markets right now. Janet Yellen said June 1st, but the CBO said with any luck on June 15, corporate tax revenues will allow the federal government to get through July.   

In any event, there's a lot of good staff-work going on between the White House and Congress and the possibility is strong that a final deal will include a COVID aid clawback, energy permitting and work requirements, along with some kind of speed limit cap on spending growth.   

I've said all along that Kevin McCarthy has the whip hand and his conference is going to stick with it. I think a Federal Reserve interest rate pause, combined with an increase in the debt ceiling, along with pro-growth policy reforms, would be very bullish for the stock market and the economy.   

There will be no default. There will be better growth, a lot better than the 0.9% recession-prone GDP of the past 15 months. Inflation will continue to ease. And let me inject one final thought: An absolutely beautiful speech by Fed governor Christopher Waller, which opens up like this: "Climate change is real, but I do not believe it poses a serious risk to the safety and soundness of large banks or the financial stability of the United States... and I believe risks posed by climate change are not sufficiently unique or material to merit special treatment relative to others, but my role is not to be a climate policymaker. I must focus on financial risks." 

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Fed speeches are not usually bedside reading, but honestly, you've got to get a hold of this. Go to federalreserve.gov if you want to read the most sensible monetary speech maybe in history.   

Save America. Read Christopher Waller. Save America. Pass the McCarthy bill.  Save America. Free market capitalist optimism is alive and well.   

This article is adapted from Larry Kudlow’s opening commentary on the May 12, 2023, edition of "Kudlow."