"The Spending Deal is Done"

MONETARY

• Within the release of the January FOMC meeting minutes, FOMC participants and staff made a number of observations regarding the current state of the U.S. Economy, as well as financial markets¹
  • Regarding economic growth, participants noted the recent economic growth came in above expectations, and that several factors were contributing the this outsized growth¹
    • (Federal Reserve) “participants noted that recent indicators suggested that economic activity had been expanding at a solid pace.”¹
    • (Federal Reserve) “Participants observed that the unexpected strength in real GDP growth in the fourth quarter reflected stronger-than-expected net exports and inventory investment, which tend to be volatile and may carry little signal for future growth. Still, consumption continued to grow at a solid pace.”¹
  • FOMC participants noted that consumers remain well postured as it relates to spending and employment, however some risks are present in the current economic backdrop¹
    • (Federal Reserve) “consumer spending had been stronger than expected, supported by low unemployment and solid income growth. A number of participants judged that consumption growth was likely to moderate this year, as growth in labor income was expected to slow and pandemic-related excess savings were expected to diminish.”¹
    • (Federal Reserve) “some participants noted signs that the finances of some households—especially those in the low- and moderate-income categories—were increasingly coming under pressure, which these participants saw as a downside risk to the outlook for consumption. In particular, they pointed to increased usage of credit card revolving balances and buy-now-pay-later services, as well as increased delinquency rates for some types of consumer loans.”¹
  • Regarding more recent concerns that some banks were facing liquidity pressures due to the degradation of the commercial real estate sector, participants stressed that the financial system remains on sound footing¹
    • (Federal Reserve) “Participants judged that liquidity in the financial system remained more than ample and discussed the importance of considering liquidity conditions as the Federal Reserve’s balance sheet continues to normalize”¹
    • (Federal Reserve) “While participants noted that they were not seeing any signs of liquidity pressures at banks, several participants noted that, as a matter of prudent contingency planning, banks should continue to improve their readiness to use the Federal Reserve’s discount window”¹

FISCAL

• Pursuant to the Federal Government’s SAVE Plan, the Biden Administration approves the cancellation of roughly $1.2B in student loans for about 153,000 borrowers²
  • To date, the Biden Administration has cancelled student loans amounting to over $130B²
    • (White House) “The Biden-Harris Administration has now approved nearly $138 billion in student debt cancellation for almost 3.9 million borrowers through more than two dozen executive actions.”
  • To qualify for student loan forgiveness under the SAVE Plan, borrowers must have been repaying their loans for at least 10 years, and also have originally taken out less than $12,000 in loans²
    • (Whtie House) “The borrowers receiving relief are the first to benefit from a SAVE plan policy that provides debt forgiveness to borrowers who have been in repayment after as little as 10 years and took out $12,000 or less in student loans.”
  • In addition to the outright cancellation of debt, the SAVE Plan also includes massive changes to the payments that student loan borrowers are responsible for²
    • (White House) “Under the SAVE plan, monthly payments are based on a borrower’s income and family size, not their loan balance. The SAVE plan ensures that if borrowers are making their monthly payments, their balances cannot grow because of unpaid interest. And, starting in July, undergraduate loan payments will be cut in half, capping a borrower’s loan payment at 5% of their discretionary income. Already, 7.5 million borrowers are enrolled in the SAVE Plan, and 4.3 million borrowers have a $0 monthly payment.”²
  • House Speaker Mike Johnson, R-La., and Senate Majority Leader Chuck Schumer, D-N.Y., said in a joint statement that negotiators have come to an agreement on six spending bills to fund various government agencies through FY 2024⁴
    • The agencies whose spending bills have been agreed upon include Agriculture, Commerce, Energy, Interior, Justice, Transportation and Veterans Affairs⁴
    • The group stated that the Defense, Financial Services and General Government, Homeland Security, Labor-HHS, Legislative Branch, and State and Foreign Operations departments will be finalized, voted on, and enacted prior to March 22⁴

GEOPOLITICS

• China, still dealing with the far-reaching effects of its property bubble collapse, implements several measures to address economic concerns across the country³
  • Proposed measures include cutting the amount of reserves banks must hold, cutting interest rates for rural and small business borrowers, and allowing property developers to use commercial property loans to repay other loans outstanding³
  • Additionally, there have been reports that government officials have been requesting that state-linked investment begin buying Chinese stocks to prop-up the falling markets³
  • The government also is reportedly preparing to deal with a larger than usual budget deficit this year as the government seeks to ramp up spending in domestic infrastructure³

[See Below for Disclosures & Annotations]

DISCLOSURES

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.

Tax laws and regulations are complex and subject to change, which can materially impact investment results. LPL Financial does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.

 

ANNOTATIONS

1. Federal Reserve. “Minutes of the Federal Open Market Committee January 30–31, 2024”. February 21, 2024
2. The White House. “FACT SHEET: President Biden Cancels Student Debt for more than 150,000 Student Loan Borrowers Ahead of Schedule”. Feb 21, 2024
3. The Wall Street Journal. “China’s Rapid-Fire Stimulus Reveals Growing Concerns Over Economy”. January 25, 2024
4. NBC. “Congress strikes deal to avert a partial government shutdown — for now”. Feb 29, 2024