Unchartered Waters

MONETARY

• Pursuant to the September FOMC meeting, the Federal Reserve opted to leave its policy rate unchanged at a rate of 525-550bps. Over the past year, the Fed has raised its Target Federal Funds Rate by 525bps marking a historically significant rate of monetary policy tightening. At the conclusion of the meeting, Fed Chairman Jerome Powell commented on a number of economic developments relevant to the current state of the United States’ Economy¹
  • Regarding the state of the Consumer, Chairman Powell noted that Consumer Spending has been relatively robust, as wage growth continues to be a large factor in spending growth¹
    • (Powell) “Recent indicators suggest that economic activity has been expanding at a solid pace, and, so far this year, growth in real GDP has come in above expectations. Recent readings on consumer spending have been particularly robust.”¹
  • On the topic of potential future interest rate hikes to come, Chairman Powell noted that there remains an degree of uncertainty amongst FOMC participants over what the future policy course should look like¹
    • (Powell) “the fact that we decided to maintain the policy rate at this meeting doesn’t mean that we’ve decided that we have or have not at this time reached that (restrictive level).” “…a majority of participants believe that it is more likely than not that it will be appropriate for us to raise rates one more time in the two remaining meetings this year. Others believe that we have already reached that. So it’s, it’s something where we’re not making a decision about by deciding to just maintain the rate and await further data”¹
  • On the topic of a government shutdown causing detrimental economic effects, Chairman Powell emphasized that traditionally those events do not produce much macroeconomic disruptions¹
    • (Powell) “I don’t know if you mentioned shutdown; I think of all of these as being on the list. We don’t comment on that. It hasn’t traditionally had much of a macroeconomic effect.”¹
  • On the topic of a soft landing, Chairman Powell noted that there has been significant progress in bringing inflation back down the normalized levels while Unemployment has not spiked in response, thereby giving the Fed more flexibility in its policy-making decisions moving forward¹
    • (Powell) “I do think it’s possible. And, you know—I also think, you know, this is why we’re in a position to, to move carefully again.” “…The fact that we’ve come this far lets us really proceed carefully, as I keep saying. So I think, you know, that’s, that’s the end we’re trying to achieve. I wouldn’t want to handicap the likelihood of it, though. It’s not up to me to do that.”¹
    • (Powell) “We’d like the current trend to continue, which is that we’re making progress without seeing the kind of increase in unemployment that we’ve seen in past things. But you’re right, though. When we raise rates, people who are, you know, living on credit cards and, and borrowing are going to feel that more.”¹
  • Additionally, this FOMC meeting was accompanied by an updated set of economic projections by FOMC participants, in which estimates for future GDP Growth, Inflation, and Interest Rates are communicated¹
    • FOMC participants increased their previous estimates for 2024 GDP growth from a previous level of 1.1% to a new level of 1.5%, largely reflecting expectations for a more resilient economy in the year to come¹
    • Expectations for Unemployment throughout 2024 also ticked downward, coming in at a lower level of 4.1%, down from the prior estimate of 4.5%, a sign that labor markets are expected to remain slightly tighter for longer, a potentially beneficial sign for continued wage growth¹
    • Inflation Expectations were entirely unchanged from the previous estimates. 2024 Inflation is still projected to come in at a level of 2.5%, a level that is largely considered normalized¹

FISCAL

• Speaker of the House Kevin McCarthy ousted from position in a first of its kind happening in US history. Republican representative Patrick McHenry (R-NC) will temporarily serve as the interim Speaker of the House until a vote is held for a permanent replacement²
  • Representative Matt Gaetz (R-FL) proposed the historic ‘motion to vacate’ and garnered enough support ultimately oust McCarthy²
  • Dissent over McCarthy’s tenure as Speaker of the House grew in response to criticisms that the former speaker made too many concessions with Democrats and veered too far away from Republican demands during various negotiation processes²
    • Move to oust McCarthy may indicate that Republican representatives will not tolerate major concessions to the Democratic party during the course of budget negotiations, a cited reason for McCarthy’s removal²
• The Biden Administration approves an additional $9B in student loan relief for roughly 125,000 Americans. The additional relief brings the total amount of student loans forgiven by the Biden Administration to about $127B, which has applied to about 3.6M borrowers so far³
  • The details of the Biden Administration’s student loan relief to date are as follows:
    • $42 billion for almost 855,000 borrowers who are eligible for forgiveness through income-driven repayment³
    • Almost $51 billion for 715,000 public servants through Public Service Loan Forgiveness programs³
    • $11.7 billion for almost 513,000 borrowers with a total and permanent disability³
    • $22.5 billion for more than 1.3 million borrowers who saw their institutions precipitously close, or are covered by related court settlements³

MISCELLANEOUS

• On September 15, the United Auto Workers union authorized strikes at select ‘Big Three’ automaker plants (Ford, GM, Stellantis)⁴
  • Since the initiation of strikes, the UAW has expanded its strikes at additional plants, but has made progress in negotiations with all big three automakers⁴
  • The UAW’s list of demands includes major items such as:
    • 40% pay increases over the life of the labor contract⁴
    • Annual cost of living adjustments⁴
    • Return of Defined Benefit pensions⁴
    • 32hr workweeks⁴
    • Eliminating pay gaps between younger and older employees⁴
    • Mandatory unionization of new EV battery plants⁴
  • Negotiations are ongoing at all big three automakers⁴

 

[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. The Federal Reserve. “Transcript of Chair Powell’s Press Conference”. September 20, 2023
2. NPR. “4 takeaways from the historic ousting of House Speaker Kevin McCarthy”. October 4, 2023
3. The White House. “President Biden Announces an Additional $9 Billion in Student Debt Relief for 125,000 Americans”. October 4, 2023
4. Reuters. “UAW and Ford Motor make progress in labor negotiations”. October 5, 2023