"New Year, New Fed"

MONETARY

• The recent release of the Federal Reserve’s FOMC minutes included extensive commentary and examination of various considerations surrounding the eventual Monetary Policy normalization efforts of the Federal Reserve⁵
  • Participants noted that the two major means by which the Fed would implement policy renormalization would be through a combination of Federal Funds Rate Hikes and Balance Sheet Reductions⁵
    • However, participants did note that hikes to the Federal Funds Rate will be the primary mechanism by which the Fed conducts renormalization efforts due to the view that there is less uncertainty around the economic effects of rate hikes than balance sheet reductions⁵
    • Additionally, the Fed noted that increasing the Federal Funds Rate is a more familiar policy tool to the general public and would be advantageous for communication purposes⁵
  • Federal Reserve staff noted several differences facing the Fed and the Economy at present time relative to the previous policy renormalization efforts in 2014. Differences included:⁵
    • The current economic outlook for the U.S. Economy is much stronger at present time than during previous renormalization efforts⁵
    • Inflation is currently running at higher levels relative to the previous renormalization effort⁵
    • Labor Market conditions remain much tighter now than during 2014’s renormalization efforts⁵
    • The Federal Reserve’s Balance Sheet is now much larger than in the previous renormalization effort⁵
    • The Maturity Composition of the Federal Reserve’s Balance Sheet is much shorter than in the 2014 effort⁵
      • Participants noted that the shorter Maturity Composition of the Balance Sheet would mean a quicker reduction in Balance Sheet levels if the Fed opted to adopt its prior method of allowing securities to “run-off” its Balance Sheet upon maturtiy⁵
      • Participants observed that implementing a system of Monthly Balance Sheet Reduction Caps would increase policy transparency and allow the Fed to better control “run-off”⁵
    • Fed participants also observed that a shorter period of time between the initial rate hike and the start of balance sheet reductions would likely be warranted in the current economic environment⁵
      • In the prior renormalization effort, there was a period of almost 2 years between the initial rate increase and the start of balance sheet reductions⁵
      • Fed participants judged that in the current economic environment it would likely be appropriate to start balance sheet reductions at some point close to, but after, the initial rate hike⁵

 

FISCAL

• Democrat lawmakers run into opposition from Sen. Joe Manchin (D-WV) and Sen. Kyrsten Sinema (D-AZ) on a proposed strategy to change Senate filibuster rules²
  • Proposed strategy of altering Senate filibuster rules would have allowed the Democrat party to pass legislation without needing 60 Senators voting to end debate on a bill, thereby bringing the bill to a formal/final vote²
    • Democrat lawmakers had intended to change the filibuster rules to be able to pass voting right legislation known as the ‘For the People Act’ strictly along party lines without any Republican support²
  • Changing or eliminating the Senate filibuster rules would require the vote of 50 Senators, with a tiebreak vote by the Vice President if needed²
  • An alternative proposal to a universal elimination or changing of the filibuster rules would be to create a carve-out exception to filibuster rules only for legislation on voting rights²
    • This alternative has largely been opposed by Sen. Joe Manchin (D-WV), along with Republican lawmakers, which would make the exception difficult to accrue the necessary 50 votes²
• President Biden’s Build Back Better Plan is effectively tabled by Democratic lawmakers after failing to come to an agreement with opposing Sen. Joe Manchin (D-WV)^3,4
  • A primary source of Senator Machin’s opposition to the Build Back Better Bill revolves around the extension of the Enhanced Child Tax Credit^3,4
    • Manchin has stated that he would not support an extension of the Child Tax Credit without the addition of a work requirement for parents, which drew opposition from other Democrat lawmakers^3,4
  • Some alternative routes forward for the Build Back Better Plan could potentially involve one or more of the following^3,4
    • Agreement on a smaller version of the BBB Plan^3,4
    • Passing separate legislation on climate-only initiatives within the BBB Plan, thereby leaving out the more contentious social spending policies currently being debated^3,4
    • Relying on annual spending bills to achieve climate-based initiatives^3,4
    • Failure to come to a deal on the BBB Plan, or a separate climate-only piece of legislation^3,4

 

GEOPOLITICS

• A dispute-settlement panel finds that Canada violated the terms of the 2020 U.S-Mexico-Canada Trade Agreement¹
  • The panel found that Canada had been unfairly reserving most of the U.S. dairy exports for the exclusive use of Canadian processors, thereby crowding-out other Canadian businesses such as retailors from trade¹
  • (Jim Mulhern – U.S. National Milk Producers Federation)
    • “The United States and Canada negotiated specific market-access terms covering a wide variety of dairy products, but instead of playing by those mutually agreed upon rules, Canada ignored its commitments…”¹
    • “As a result, U.S. dairy farmers and exporters have been unable to make full use of USMCA’s benefits.”¹
  • Canada has until February 3 to respond to the judgement or make changes to its policies to come into compliance with the deal¹

 

MISCELLANEOUS

• Broader Stock Market selling pressures reach Cryptocurrency Markets, simultaneously bringing down price levels of various popular cryptocurrencies such as Bitcoin, Ethereum, Solana, Cardano, Dogecoin, and many more⁶
  • Crypto analysts note that the behavior of many cryptocurrencies appears to more closely resemble that of growth stocks, rather than an inflation protected store of value which is what many crypto proponents suggest is the purpose of cryptocurrencies⁶
  • Some analysts suggest that price levels could still drop further on the back of tighter monetary policy by the Fed⁶
    • (Yuya Hasegawa – BitBank) “The downward pressure on the price is expected to continue until the market fully prices in the tighter-than-expected future monetary policy”⁶

[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. Bloomberg. “U.S. Wins Canada Trade Spat as Panel Says Dairy Rules Defy Pact”. January 4, 2022.
2. The Wall Street Journal. “Manchin Deflates Democrats’ Hopes of Changing Filibuster, Passing Election Bills”. January 4, 2022
3. CNBC. “Joe Manchin says he has had no talks about resurrecting Biden’s Build Back Better plan”. January 4, 2022
4. CNBC. “Joe Manchin reiterates that he won’t support enhanced child tax credit without a work requirement”. January 4, 2022
5. The Federal Reserve. “Minutes of the Federal Open Market Committee December 14–15, 2021”. January 5, 2022
6. CNBC. “Bitcoin and other cryptocurrencies slide as global stocks fall on hawkish Fed minutes”. January 6, 2022