"Uncle Sam Makes a Deal"

MONETARY

• In the most recent FOMC Minutes release, Fed participants noted a number of economic developments as it pertains to the current state, and future outlook, of the U.S. Economy¹
  • Regarding the current state of economic growth, participants noted that Real GDP growth was modest in the aggregate in the first quarter of 2023, however Consumer Spending remained robust¹
    • Moving forward, participants noted the possibility of aggregate growth remaining subdued in response to the effects of more restrictive monetary policy¹
    • (FOMC) “Participants generally expected real GDP to grow at a pace below its longer-run trend rate in 2023, reflecting the effects of restrictive financial conditions. Participants assessed that the cumulative tightening of monetary policy over the past year had contributed significantly to more restrictive financial conditions”¹
  • Participants also noted that although inflationary pressures remained slightly above the Federal Reserve’s target of 2.0% over the past 12 months, consumer inflation expectations continue to remain low¹
    • (FOMC) “The latest survey-based measures of longer-term inflation expectations from the University of Michigan Surveys of Consumers in April and the Federal Reserve Bank of New York’s Survey of Consumer Expectations in March remained within the range of their values reported in recent months; near-term measures of inflation expectations from these surveys moved up but were still below their peaks seen last year.”¹
  • Observations of the Labor Market continue to note the historically strong levels of job and wage growth over the past year, as well as the historically low levels of overall unemployment¹
    • (FOMC) “Participants noted that the labor market remained very tight, with robust payroll gains in March and an unemployment rate near historically low levels. Nevertheless, they noted some signs that the imbalance of supply and demand in the labor market was easing, with prime-age labor force participation returning to its pre-pandemic level and further reductions in the rates of job openings and quits.”¹

FISCAL

• President Biden and House Speaker Kevin McCarthy reach a tentative deal on Debt Ceiling negotiations, which still requires passage through Congress and may still be amended³
  • The agreement in principle comes a few days prior to the newly stated ‘cutoff’ date of June 5. A date where U.S. Treasury Secretary Janet Yellen says a deal will need to be reached by to avoid the government defaulting on various oblligations³
  • The House of Representatives is set to vote on the deal on Wednesday, May 31, which would give the Senate time to take up the bill before the June 5 cutoff³
  • The exact details of the agreement are not yet known in full, however there are some major headlines regarding the agreement that are currently public:³
    • Providing for a 2-year Debt Limit increase, with no specified cap on new debt issuance allowed within the 2-year period. The suspension of the Debt Ceiling would sunset in January 2025³
    • Non-Defense spending would remain flat through 2024, and then increase by 1% in 2025³
    • Fully funded medical care for Veterans as outlined in President Biden’s 2024 Budget Proposal³
    • Increased age-based working requirements for recipients of SNAP (food stamps) from the previous level of 49yrs to 54yrs. This would not apply to veterans, homeless people, and people who were children in foster care³
    • Implementing changes to the National Environmental Policy Act that would designate “a single lead agency” to develop environmental reviews to expedite the process³
    • Partially reversing some previously passed funding enhancements to the IRS. This would entail rescinding $1.38 billion of funding, and redesignate another $20 billion from the $80 billion gained through the Inflation Reduction Act³

GEOPOLITICS

• China formerly declines an offer from the United States for a meeting between each country’s Defense Chiefs at an annual security conference in Singapore in early June²
  • Rejection of the offer is largely attributed to previous sanctions that the United States has imposed of China’s Minister of National Defense Li Shangfu over 2018 purchases of combat aircraft and equipment from Russia’s main arms exporter, Rosoboronexport²
  • Foreign Ministry Spokesperson Mao Ning referenced the sanctions in an official response²
    • (Ning) “The U.S. side should … immediately correct its wrong practices, show sincerity, and create the necessary atmosphere and conditions for dialogue and communication between the two militaries”²

 

[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 – May 2-3, 2023”. May 24, 2023
2. Reuters. “China declines US request for a meeting between defense chiefs”. May 29, 2023
3. PBS. “What’s in and what’s out of the debt ceiling deal between Biden and McCarthy”. May 28, 2023