"The Inflation Cliff"

MONETARY

• As noted by the most recent FOMC minute release, FOMC participants discussed a number of relevant economic developments currently affecting the U.S. Economy¹
  • Regarding economic growth and inflation risks facing the U.S. Economy, some degree of variance was apparent in forward-looking expectations¹
    • (FOMC) “Market participants generally expected U.S. economic growth to moderate this year, although there was a wide dispersion in views about the extent of a potential slowdown. Market participants interpreted incoming data as pointing to moderating inflation risks.”¹
  • FOMC participants also continue to expect reductions in Inflationary pressures to persist through the foreseeable future¹
    • (FOMC) “On a four-quarter change basis, total PCE price inflation was forecast to be 2.8 percent in 2023, and core inflation was expected to be 3.2 percent, both lower than in the December projection. With the effects of supply–demand imbalances in goods markets expected to further unwind and labor and product markets projected to become less tight, the staff continued to forecast that inflation would decline further over 2024 and 2025.”¹
  • Specifically, regarding the outlook for Energy and Food costs, FOMC participants continue to project significant moderation in pricing pressures¹
    • (FOMC) “With steep declines in consumer energy prices and a substantial moderation in food price inflation expected for this year, total inflation was projected to step down markedly this year and then to track core inflation over the following two years”¹
  • Reflecting on the current excess budget surpluses that states have been recently experiencing, some participants foresaw the possibility of potential state-run accommodative fiscal policy measures¹
    • (FOMC) “a couple of participants noted that some states could return part of their sizable budget surpluses to households through tax cuts or rebates, which would provide support to consumption.”¹
  • With regards to the Labor Market, participants noted that Employment remains strong, and that more publicized layoffs at large tech companies do not reflect the overall state of business sentiment for hiring¹
    • (FOMC) “Several participants noted that recent reductions in the workforces of some large technology businesses followed much larger increases over the previous few years and judged that these reductions did not appear to reflect widespread weakness in the demand for labor. A few participants remarked that some business contacts appeared keen to retain workers even in the face of slowing demand for output because of their recent experiences of labor shortages and hiring challenges.”¹
  • Almost all FOMC participants favored 25bps hikes as the Fed inches closer to its final Terminal Rate to allow the Fed more time to assess the effects of prior Monetary Policy actions, which tend to operate on a lag¹
    • (FOMC) “almost all participants agreed that it was appropriate to raise the target range for the federal funds rate 25 basis points at this meeting. Many of these participants observed that a further slowing in the pace of rate increases would better allow them to assess the economy’s progress toward the Committee’s goals of maximum employment and price stability as they determine the extent of future policy tightening that will be required to attain a stance that is sufficiently restrictive to achieve these goals”¹

 

FISCAL

• The US Commerce Department begins its application regarding the distribution of funds under the $53B CHIPS Act. Commerce Department reveals sweeping restrictions to be put in place for recipient companies, which include prohibitions on expanding production in China, as well as various labor-related mandates²
  • Companies receiving funds under the CHIPS Act will be prohibited from expanding their production capacity in China over the next decade²
  • Additionally, the legislation calls for the use of union labor by recipient companies²
  • Firms receiving funds under the CHIPS Act will be required to remit a portion of their profits from the financed projects to the Federal Government²
  • Secretary of Commerce Gina Raimondo laid out the administration’s overall intent regarding the prohibitions²
    • (Raimondo) “In giving out the funding, we’ll be implementing a number of safeguards to ensure companies that receive funding are holding up their end of the bargain…” “We are not writing blank checks”²

 

GEOPOLITICS

• United States discusses with its allies possible ramifications and sanctions to impose on China should the country supply military aid to Russia³
  • White House officials have stated that there are ‘indications’ that China has considered supplying military aid to Russia pursuant to its conflict in Ukraine. The potential for such action was sternly discouraged by the US Department of Defense³
    • (Ryder) “And, so, we want to be crystal clear that that would be a poor decision, should they decide to do that.”
  • China’s Foreign Ministry Spokesman, Mao Ning stated³
    • (Ning) “We believe that all countries deserve respect for their sovereignty and territorial integrity, that the purposes and principles of the U.N. charter should be observed, that the legitimate security concerns of any country should be taken seriously, and that support should be given to all efforts that are conducive to peacefully resolving the crisis”³
    • (Ning) “We hope all parties will properly address their differences through dialogue and consultation. China stands ready to continue to play a constructive part in de-escalation efforts.”³
• Biden Administration lays out its proposed framework to address its International Trade Policy Agenda in 2023⁴
  • Some highlights of the agenda include⁴
    • The Indo-Pacific Economic Framework for Prosperity:⁴
      • (USTR) “USTR and the Department of Commerce are negotiating an innovative trade framework with 13 countries in the Indo-Pacific region that, combined with the United States, represent 40% of global GDP.  The IPEF will tackle 21st century challenges, particularly those exposed during the COVID-19 pandemic and Russia’s invasion of Ukraine.”⁴
    • S.-Taiwan 21^stCentury Trade Initiative:⁴
      • (USTR) “The United States and Taiwan, under the auspices of the American Institute in Taiwan (AIT) and the Taipei Economic and Cultural Representative Office in the United States (TECRO), are negotiating an ambitious new trade framework that will deepen our longstanding economic and cultural ties.”⁴
    • Americas Partnership for Economic Prosperity:⁴
      • (USTR) “Announced in June 2022, the Americas Partnership includes 11 other countries that represent about 90% of the Western Hemisphere’s GDP and nearly two-thirds of its people.  This initiative will drive the region’s economic growth and broadly shared prosperity, tackle the core issues that will define the coming decades, and galvanize greater economic cooperation in our hemisphere.”⁴

 

[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”. February 22, 2023
2. The Wall Street Journal. “U.S. Aims to Chart New Course for Chip Industry”. Feb 28, 2023
3. U.S. Department of Defense. “U.S. Officials Urge China Not to Ship Arms to Russia”. Feb 28, 2023
4. USTR. “USTR Releases President Biden’s 2023 Trade Policy Agenda and 2022 Annual Report”. March 1, 2023