"Don’t Get Spooked, Stay Informed"

MONETARY

• Pursuant to its most recent FOMC meeting, the Federal Reserve opts to raise its target Federal Funds Rate by 75bps, to a new level of 3.0-3.25%. Additionally, the Fed released an updated version of its Summary of Economic Projections document, in which the Fed outlines its future expectations of relevant economic variables¹
  • Within the Fed’s Summary of Economic Projections significant revisions were made to a number of key variables²
    • Regarding future expectations for GDP growth, the Fed revised its expectations for 2022 to a lower level of 0.2%, down materially from its prior projection of 1.2% back in June. Additionally, the Fed slightly lowered its expectations for 2023 GDP growth to a level of 1.2%, down from the prior estimate of 1.7%²
      • The downward revisions were due mainly to the Fed’s expectation that tighter monetary policy conditions will begin to have more restrictive effects on not only consumer spending but on business spending as well²
    • The Fed also slightly revised its estimate for Unemployment upward slightly for 2023 to a level of 4.4%, up from its prior estimate of 3.9%²
      • Important to note, the Fed does not view its increase in expectations of unemployment as a sign of impending recession, but rather a ‘cooling-off’ of an arguably overheated labor market²
    • Inflation expectations were raised slightly, but not meaningfully for 2023. Headline PCE Inflation is now expected to come in around a level of 2.8%, up from the prior estimate of 2.6%. Core PCE Inflation is now expected to come in at a level of 3.1%, up from its prior estimate of 2.7%²
      • The fact that the Fed’s expectations of future inflation are now calling for higher Core Inflation versus Headline Inflation (in an absolute sense) is an indication that the Fed may be anticipating further normalization in Food & Energy prices²
    • Federal Reserve also increased its projection for where it anticipated the appropriate level of the Fed Funds rate to be in 2023 to a level of 4.6% from the prior projection of 3.8%²
      • The increase in projected rates was to represent the Federal Reserve’s commitment to addressing inflationary pressures, and could be subject to an equally significant downward revision in the event that more appropriate Inflation & Labor Market data manifest²
      • It may be likely that the Federal Reserve increased its internal expectations of future Fed Funds rate levels to help maintain more restrictive financial conditions in longer-term rates which could help the Fed achieve its goal of more stable/lower inflation²

 

FISCAL

• The Biden Administration makes significant adjustments to its previously announced student loan forgiveness program, effectively scaling back eligibility for who qualifies to have their student loans forgiven⁵
  • The adjustment changes the types of loans that will be eligible for loan forgiveness⁵
    • The Department of Education stated that “…borrowers with federal loans owned by private banks but backed by the government, including the Federal Family Education Loan Program (FFEL) and Perkins loans, will no longer be eligible unless they already consolidated their loans into the government’s direct lending program by Sept. 29.”⁵
  • The adjustment to the program will now reverse eligibility for loan forgiveness for about 770,000 borrowers and exclude them from having their student loans forgiven⁵

 

GEOPOLITICS

• In response to the recent pullback in Oil prices, international oil cartel OPEC+ agreed to reduce its aggregate oil output by 2 million barrels per day. This is the largest production cut that OPEC+ has opted for since 2020³
  • Move comes in stark contrast to previous Biden Administration requests for OPEC+ to raise oil output to help lower overall inflation ahead of the midterm elections³
    • (White House) “…disappointed by the shortsighted decision by OPEC+ to cut production quotas while the global economy is dealing with the continued negative impact of Putin’s invasion of Ukraine.”³
    • Additionally, the Biden Administration has stated that it will release an extra 10 million barrels from the U.S. Strategic Petroleum Reserve over the next month³
  • U.S. Domestic Oil Production has still yet to reach its pre-pandemic level, currently undershooting that mark by about 1 million barrels per week³
  • Some alternative measures for responding to the unfavorable production cuts include removing U.S. troops and missile defense systems from Saudi Arabia and the United Arab Emirates, as well as removing sovereign immunity from OPEC+ member countries, allowing the Justice Department to sue member countries for antitrust violations³
• Swedish investigators conclude their preliminary investigation into the Nord Stream pipeline leak and conclude that underwater detonations were the cause of the rupture, indicating a strong sign of sabotage⁴
  • On September 30, President Joe Biden called the act a “deliberate act of sabotage” that was designed to cause sharp price increases of natural gas directly ahead of the upcoming winter months where demand is seasonally higher⁴

 

[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. “Federal Reserve issues FOMC statement”. September 21, 2022.
2. Federal Reserve. “Federal Reserve Board and Federal Open Market Committee release economic projections from the September 20-21 FOMC meeting”. September 21, 2022.
3. CNBC. “U.S. delivers angry rebuke of massive OPEC+ production cut — and it could backfire for Saudi Arabia”. October 6, 2022.
4. Bloomberg. “Nord Stream Leaks Caused by Detonations in Sign of Sabotage”. October 6, 2022.
5. Fox13. “Student loan forgiveness eligibility scaled back; here’s what you need to know”. October 6, 2022.