"Specters of Yesteryear Haunt Again"

MONETARY

• In the most recent publication of the Federal Reserve’s FOMC Minutes, Fed participants discussed a number of developments regarding further policy normalization efforts²
  • Regarding the normalization of the Federal Reserve’s Balance Sheet, Fed officials noted that a faster Balance Sheet normalization would likely be warranted in the current economic environment relative to the prior normalization effort in 2017-2019²
  • Additionally, the Federal Reserve made the first publication of its Principles for Reducing the Size of the Federal Reserve’s Balance Sheet where high-level principles were outlined that will conceptually guide future policy normalization. The principles are as follows:²
    • The primary means for adjusting Monetary Policy will be via changes to the Federal Funds Target Rate, not via Balance Sheet Normalization²
    • FOMC participants judge that Balance Sheet Normalization will begin shortly after the first change the Federal Funds Target Rate²
    • The Fed will reduce its Balance Sheet holdings over time by adjusting the amount of funds re-invested via its existing holdings, not via explicit selling of securities²
    • Post-Normalization, the general level of the Federal Reserve’s asset holdings will be consistent with implementing Monetary Policy in its ‘Ample Reserves’ framework²
    • Over the long-run, the Federal Reserve intends to primarily hold Treasury Securities, rather than a blend of Treasury Securities and Mortgage-Backed Securities²
• In the March release of the Federal Reserve’s Beige Book publication, Federal Reserve staff noted a number of developments pertaining to various ongoing economic themes⁶
  • Staff noted that overall economic growth grew at a modest to moderate pace from the prior reporting period⁶
    • Among the factors cited as having constrained growth in the period were Supply Chain Issues, Worker Absenteeism, Low Inventory Levels, and Disruptive Winter Weather⁶
    • It was also noted that the overall economic outlook over the next 6 months remained optimistic, but that a high degree of uncertainty remained⁶
  • Overall employment increased over the period at a modest to moderate pace, with many contacts reporting worker supply issues remain presistent⁶
    • Although it was noted that some contacts reported scattered improvement in labor supply issues, while at the same time reporting a moderation in previously robust wage growth levels⁶
    • Moving forward, many reporting districts expect labor market conditions to remain tight throughout the coming year⁶
  • Regarding Inflation, consumer-facing prices were reported to have increased at a robust pace relatively uniformly across the nation⁶
    • Elevated Input Costs were cited as a primary factor in driving higher consumer-facing prices, as businesses do not appear to be having much trouble passing-along higher costs to end consumers. It was noted that Transportation Costs were a significant factor in driving Input Costs higher⁶
    • Higher labor costs and material shortages were also cited as factors contributing to higher Input Costs⁶

 

FISCAL

• In his first State of The Union address, President Biden highlights a multitude of noteworthy topics ranging from Ukraine, domestic inflation, and infrastructure stimulus³
  • Highlighted the need for congress to pass the “America Competes” act, which includes a number of provisions including³:
    • $52B for domestic semiconductor production⁴
    • $45B for improving supply chains for critical items⁴
    • $160B for research and scientific innovation⁴
  • Speech also signaled a shift away from the stalled Build Back Better framework to a new 4-point framework which would conceptually include³
    • Moving goods cheaper and faster⁵
    • Reducing everyday costs⁵
    • Promoting competition⁵
    • Eliminating barriers to jobs⁵

 

GEOPOLITICS

• In response to Russia’s invasion of Ukraine, the United States and European Union announce mass economic sanctions targeting various segments of the Russian economy. Some of the most noteworthy sanctions include:^7,8
  • Isolating Russia’s largest financial institution, Sberbank, from the U.S. financial System^7,8
  • Full blocking restrictions on a number of Russia’s largest financial institutions including VTB Bank, Bank Otkritie, Sovcombank OJSC, and Novikombank⁸
  • Debt and equity restrictions on thirteen of the most critical major Russian enterprises and entities⁸
  • Full blocking sanctions on various Russian elites and their family members⁸
  • Sweeping restrictions on Russia’s military⁸
  • Sanctions against various Belarussian individuals and entities^7,8
  • Restrictions on Russian imports of critical technological goods⁸
  • Restrictions on Belarussian imports of critical technological goods⁸
  • Full blocking sanctions on Russian defense entities^7,8
  • Export controls for oil extraction equipment^7,8
  • Banning Russian aircraft from entering and using domestic U.S. airspace^7,8
  • Excluding seven Russian banks from the international SWIFT messaging system (VTB, Bank Otkritie, Novikombank, Promsvyazbank, Bank Rossiya, Sovcombank and VEB)⁹
• United States and Japan reach an agreement to end U.S. tariffs on steel imports from Japan¹
  • Deal is scheduled to come into effect April 1, and will exclude aluminum¹
  • Pursuant to the agreement, imported steel from Japan must be entirely produced within Japan to be able to qualify for duty free access to the United States¹
    • This measure was taken to reduce the possibility of Chinese steel circumventing U.S. tariffs by coming to the U.S. from intermediary countries¹
  • The deal also limits Japanese steel imports to around 2018-2019 levels¹

 

[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. “U.S., Japan reach deal to cut tariffs on Japanese steel, fight excess output”. February 8, 2022
2. Federal Reserve. “Minutes of the Federal Open Market Committee: January 25–26, 2022”. February 16, 2022
3. The Wall Street Journal. “Biden’s State of the Union Address Pushes Unity Against Russia, Battle Against Inflation”. March 2, 2022
4. NPR. “The House passed a bill aimed at boosting U.S. competitiveness with China”. February 4, 2022
5. Reuters. “In speech, Biden to shift from Build Back Better bill to 4-point economic rescue plan”. March 1, 2022
6. Federal Reserve. “The Beige Book: Summary of Commentary on Current Economic Conditions”. March 2, 2022
7. The White House. “FACT SHEET: The United States Continues to Impose Costs on Russia and Belarus for Putin’s War of Choice”. March 2, 2022
8. The White House. “FACT SHEET: Joined by Allies and Partners, the United States Imposes Devastating Costs on Russia”. February 24, 2022
9. Reuters. “EU bars 7 Russian banks from SWIFT, but spares those in energy”. March 2, 2022