Forget the Forgiveness

MONETARY

• Pursuant to the most recent FOMC Minutes release, Federal Reserve participants discussed a variety of relevant factors regarding the US Economy as it pertains to Interest Rates, Inflation, Labor Market, and Banking Sector¹
  • Regarding previous Interest Rate Hikes, participants noted that the significant degree of tightening that has already taken place has had intended effects on certain areas of the economy¹
    • “They assessed that the cumulative tightening of monetary policy over the past year had contributed significantly to more restrictive financial conditions and lower demand in the most interest rate sensitive sectors of the economy, especially housing and business investment.”¹
  • Moving forward, participants signaled that additional tightening would likely be warranted, a departure from previous FOMC discussion consensus¹
    • “Almost all participants noted that in their economic projections that they judged that additional increases in the target federal funds rate during 2023 would be appropriate.”¹
  • Projections for future inflationary pressures continue to point toward a further easing of pricing pressures¹
    • “Core goods inflation was forecast to move down further this year and then remain subdued. Housing services inflation was considered to have about peaked and was expected to move down over the rest of the year.”
    • “With expected declines in consumer energy prices and further moderation in food price inflation, total inflation was projected to run below core inflation this year and the next. In 2025, both total and core PCE price inflation were expected to be close to 2 percent.”¹
  • Fed participants noted that the ongoing strength of the labor market has continued to provide economic resiliency for consumers in spite of higher inflationary pressures¹
    • “Given the continued strength in labor market conditions and the resilience of consumer spending, however, the staff saw the possibility of the economy continuing to grow slowly and avoiding a downturn as almost as likely as the mild-recession baseline.”¹
    • “…they noted some signs that supply and demand in the labor market were coming into better balance, with the prime-age labor force participation rate moving up in recent months and further reductions in rates of job openings and quits, and declines in average weekly hours.”¹
  • Assessments of the strength of the US Banking System remain very favorable, and continue to note the resiliency of the system in the aftermath of various bank collapses earlier in the year¹
    • “Participants generally noted that banking stresses had receded and conditions in the banking sector were much improved since early March. Participants generally continued to judge that a tightening in credit conditions spurred by banking-sector stress earlier in the year would likely weigh further on economic activity, but the extent remained uncertain.”

FISCAL

• The Supreme Court votes in a 6-3 decision to disallow the Biden Administration’s attempt to forgive roughly $430B in student loans²
  • Chief Justice John Roberts summarized that while the Education Secretary does have some right to modify or waive student loans, as granted by the Heroes Act, that power does not permit the secretary to ‘rewrite that statute from the ground up’ by pursing large-scale blanket loan forgiveness²
    • (Justice Roberts) “We’re talking about half a trillion dollars and 43 million Americans. How does that fit under the normal understanding of ‘modifying’?“²
    • President Biden’s Education Secretary, Miguel Cardona, authorized permanent forgiveness of up to $10,000 for borrowers making less than $125,000 a year²
    • An additional $10,000 of relief was granted for individuals who held Pell Grants, a form of financial aid for severely needy borrowers²
  • As a result of the decision, all students who owe federal student loans will see interest start to accrue on their loans starting September 1, with the first payment due October 1²
  • Since the announcement of the policy, questions have been raised as to the fairness of the loan relief, given that many previous borrowers who paid back their loans in full would not receive any benefit, and ultimately be the ones responsible for financing the forgiveness program via taxes²
    • (Justice Alito) “All right. I’ll try one more time. Why was it fair to the people who didn’t get arguably comparable relief?”²

GEOPOLITICS

• Biden Administration considers implementing new restrictions on US Exports of AI semiconductor chips to China³
  • Arguably, this represents the first major trade war development between the US and China during the Biden Administration³
  • Exact details of what the Export restrictions would entail are not yet known, and are likely subject to change and speculation³
    • As a result of the restrictions, companies would likely have to obtain a license from the US Government before Exporting certain high performance chips to China³
  • NVIDIA previously side-stepped prior export restrictions by creating a new chip that fell below performance thresholds stipulated in the restrictions. Pursuant to the new restrictions, these lower performance chips could also be restricted³
  • China responded to these potential restrictions by imposing their own Export Restrictions by imposing export restrictionson gallium and germanium products which are input materials for chip fabrication³
    • The Chinese Ministry of Commerce stated exports of germanium and gallium will only be permitted if exporters obtain licenses from the government³

 

[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: June 13–14, 2023”. July 5, 2023.
2. The Wall Street Journal. “Supreme Court Strikes Down Biden’s Student-Loan Forgiveness Plan”. June 30, 2023.
3. The Wall Street Journal. “U.S. Considers New Curbs on AI Chip Exports to China”. June 27, 2023.