"All Clear for Liftoff"

MONETARY

• Speaking on the appropriateness of interest rate hikes in 2022, Philadelphia Fed President Patrick Harker suggests that it may be warranted for the upcoming year⁶
  • (Harker) “Right now, I think four 25-basis-point increases this year is appropriate. But there is a lot of risk here.”⁶
  • When asked about the potential appropriateness of the Fed undertaking any single 50bps increase during the renormalization period, it was noted that only under special circumstances would that be warranted⁶
    • (Harker) “If inflation stays where it is right now and continues to start to come down, I don’t see a 50-basis-point increase. But if we see a spike, then I think we might have to act more aggressively.”⁶
  • Regarding the Federal Reserve’s eventual Balance Sheet Reductions, some insights were given into timing and pace noting that Fed Funds would likely need to reach a Target Range of 1.0-1.25% before Balance Sheet Reductions would commence. It was noted that once Balance Sheet Reductions commence, they would likely occur more rapidly than in previous environments⁶
    • (Harker) “That reduction is going to be steeper and faster than the last time we tried it”⁶
  • In terms of the methodology the Fed will use to reduce its Balance Sheet, a maturity-driven methodology is largely believed to be the preferred method as opposed to a combination maturity & sell-driven approach. However, some uncertainty surrounding this consensus remains⁶
    • (Harker) “This is something we’re actively looking at right now”⁶

 

FISCAL

• President Biden concedes that the Build Back Better bill will likely have to be split up and passed in separate parts in order to be able to successfully pass-through Congress²
  • (Biden) “I think we can break the package up, get as much as we can now and come back and fight for the rest later”²
  • Individual parts of the Build Back Better legislation that are perceived as being likely to successfully pass-through Congress include the provisions on Climate & Energy, as well as Early Childhood Education²
  • Individual items that are perceived as not being able to successfully pass-through Congress, and as a result may get left out, include the Expanded Child Tax Credit and Community College Tuition Assistance²
  • The full Build Back Better bill was indefinitely stalled roughly a month ago when Senator Joe Manchin (D-WV) and other Democratic lawmakers could not come to an agreement over various provisions included in the bill, primarily the inclusion of a work requirement for receiving the Expanded Child Tax Credit²
• Several House Democrats threaten to stall legislative passage of the various separated provisions from the Build Back Better bill unless an expansion of the State and Local Tax Deduction (SALT) is included³
  • (Tom Suozzi D-NY) “We will not go for this agenda, as important as it is, unless we get the state and local tax deduction”³
  • Currently the SALT Deduction is restricted to $10,000, however the current version of the Build Back Better bill would increase the allowable deduction to $80,000³
  • The SALT deduction is considered to be a major issue for many Democratic lawmakers, especially for those representing states with higher income taxes which are typically located in the Northeast and West Coast³

 

GEOPOLITICS

• Speaking on the current state of U.S. trade relations with China, President Joe Biden comments that it is too soon to lift tariffs on Chinese goods due to China’s failure to meet specified commitments negotiated pursuant to the Phase 1 Trade Agreement implemented under the Trump Administration¹
  • (Biden) “I’d like to be able to be in a position where I could say they’re meeting their commitments, or more of their commitments, and be able to lift some of them, but we’re not there yet”¹
  • As of November 2021, it is estimated that China has only purchased about 60% of the country’s agreed-on commitments¹
  • The agreement under the Phase 1 Trade Deal was for China to purchase $200B worth of U.S. Goods and Services during the years 2020 & 2021¹
  • At present time, it is unclear what the next course of action will be in addressing the purchase shortfall1
• Russia amasses close to 100,000 troops at the eastern border of Ukraine as political and military tensions mount surrounding Russia’s demands for increased influence over Ukraine’s future^4,6
  • Amongst Russia’s list of demands includes a formal block of NATO membership for Ukraine and other ex-Soviet Union countries, in addition for a rollback of NATO military deployments in Central and Eastern Europe^4,6
  • The US is preparing economic sanctions against Russia in the event of an invasion of Ukraine. These sanctions would likely include targeting Russian banks, state-owned companies, and various key imports^4,6

 

MISCELLANEOUS

• Biden Administration is currently working to prepare a sweeping Executive Order that will seek to have federal agencies regulate cryptocurrencies and other digital assets as ‘a matter of national security’⁷
  • While the exact details of the order are not yet known, it is likely that the U.S. will need to coordinate efforts with other countries since cryptocurrencies and digital assets effortlessly move back and forth between various countries⁷
  • The U.S. is now home to more cryptocurrency miners than any other country, and it is speculated that regulations arising from the newly minted executive order may seek to target miners, among various other crypto-related parties⁷

 

[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. Reuters. “Biden says ‘not there yet’ on possible easing of tariffs on Chinese goods”. January 20, 2022
2. The Wall Street Journal. “Biden Concedes Covid-19 Frustrations, Sees Path for Stalled Bill, Warns Russia on Ukraine”. January 19, 2022
3. Bloomberg. “‘No SALT, No Deal’ as Some Democrats Demand Higher Cap in Biden Bill”. January 19, 2022
4. The Wall Street Journal. “What Does Russia Want With Ukraine? Tensions Between Putin and NATO Explained”. January 30, 2022
5. NBC. “Russia lays out tough security demands for U.S., NATO amid Ukraine invasion fears”. December 17, 2021
6. Reuters. “Fed’s Harker says four rate hikes are appropriate for this year”. February 1, 2022
7. Forbes. “‘A Matter Of National Security’—Reports Reveal Joe Biden’s Surprise Bitcoin, Ethereum And NFT Plan After Extreme Price Swings”. January 30, 2022.