"Forgiven, But Not Forgotten...."

MONETARY

• In a speech at the Fed’s Jackson Hole symposium, Federal Reserve Chairman Jerome Powell pushes back against market expectations for a future policy shift from restrictive to accommodative posturing⁴
  • Regarding the state of the Labor Market, Powell reiterated the Fed’s view expressed in prior meetings⁴
    • (Powell) “The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers”⁴
  • In reference to the potential for a near term policy shift, Chairman Powell cautioned against a premature loosening of monetary policy⁴
    • (Powell) “The historical record cautions strongly against prematurely loosening policy”⁴
  • Regarding the decision on how much to increase rates at the next FOMC meeting, Powell maintained the data-dependent stance commonly adopted by the committee, but offered some insight into the pacing of future hikes⁴
    • (Powell) “At some point, as the stance of monetary policy tightens further, it will likely become appropriate to slow the pace of increases.”
    • Additionally, Chairman Powell reiterated the Fed’s prior projections of raising rates to a level slightly below 4% through the end of 2023. Important to note, Fed projections are subject to material change in response to incoming economic data⁴
  • A primary goal of the Federal Reserve during the current stretch of abnormally high inflation has been to successfully anchor consumer expectations of future inflation to historically normal levels⁴
    • (Powell) “The longer the current bout of high inflation becomes entrenched, the greater the chance that expectations of higher inflation will become entrenched”⁴
    • Pursuant to the notion of anchoring consumer expectations of future inflation, Chairman Powell referenced the academic concept of ‘rational inattention’, whereby consumers could rationally ignore temporary price increases as eventual price normalization had historically occurred, and was therefore expected to occur again⁴

 

FISCAL

• President Biden issues an executive order that forgives up to $20,000 of federal student loan debt per borrower³
  • Borrowers must make under $125,000 a year to qualify for loan forgiveness. The amount is increased to $250,000 for married couples filing jointly³
  • Non-Pell Grant recipients are eligible for loan forgiveness up to $10,000, while Pell Grant recipients are eligible for loan forgiveness up to $20,000³
  • Independent estimates of the cost of the loan forgiveness program put the taxpayer burden at around $300B over the span of 10 years³
  • Debt forgiven pursuant to the loan forgiveness program will not create any additional taxable liability, a similar treatment that other federal student loan forgiveness programs have adopted³
  • Additionally, the student loan payment pause was extended until the end of 2022³

 

GEOPOLITICS

• Chinese city of Chengdu imposes COVID-19 related lockdowns on its 21 million residents, as fears of possible virus spread amplify in the reigon¹
  • Chengdu is the largest city in China to impose COVID lockdowns since Shanghai earlier in the year¹
  • Lockdowns in Chengdu have not yet been given an end date, and 4 day mass testing within the city was commenced on September 1¹
  • Chengdu, with its 21 million residents, accounts for approximately 1.7% of China’s total GDP¹
• In response to continued Chinese military exercises in the region, Taiwan proclaims that it will utilize its right to self-defense and counter strike measures should Chinese military forces enter its territory²
  • Taiwan defense officials state that the Chinese military has adopted the end goal of effectively transforming the Taiwan Strait into its “inner sea”²
  • White House national security spokesman John Kirby spoke regarding China’s recent efforts in the Taiwan Strait²
    • (Kirby) “The concerns expressed by leaders in Taiwan are understandable given the aggressive, assertive, coercive, and quite frankly, unnecessary, activities that the PRC continues to conduct from a military perspective in and around the Strait,”²
• Russia declares that its main natural gas pipeline to Europe, Nord Stream, will remained shut off indefinitely due to sanctions levied on Russia as a result of the Ukraine invasion^5,6
  • Prior to the invasion of Ukraine, Russia supplied roughly 40% of Europe’s natural gas needs, with its Nord Stream pipeline being the primary source of gas supplies to the reigon^5,6
  • Working to mitigate the drop in natural gas supplies, European countries have looked to replace Russian gas with international LNG shipments from the United States and the Middle East^5,6
  • Kremlin spokesman Dmitry Peskov referenced the shutdown decision with regards alleged production difficulties in the presence of sanctions^5,6
    • (Peskov) “…arose due to the sanctions imposed against our country and against a number of companies by Western states, including Germany and Great Britain.”
    • In response, Germany’s energy regulator stated, “the defects alleged by the Russian side are not a technical reason for the cessation of operations”^5,6

 

[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. Bloomberg. “China Locks Down Megacity Chengdu as Covid Zero Intensifies”. August 31, 2022.
2. Reuters. “Taiwan vows counter-attack if Chinese forces enter its territory”. August 31, 2022.
3. The Wall Street Journal. “Biden’s Student Loan Forgiveness Plan to Cancel Up to $20,000 in Debt for Millions”
4. The Wall Street Journal. “Powell Says Fed Must Show Resolve in Fighting Inflation”. August 26, 2022.
5. Reuters. “EU gas price rockets higher after Russia halts Nord Stream flows”. September 5, 2022.
6. The Wall Street Journal. “Russia’s Nord Stream Pipeline Closure Lands Economic Blow Against Europe”. September 5, 2022.