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December
15
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Week In Review

Fed Rate Hike

The Federal Reserve Open Market Committee (FOMC) announced an increase in the target range for the federal funds rate to 1.25% to 1.50%. According to the Fed statement, the labor market continued to strengthen and economic activity rose at a “solid rate.” The committee noted that household spending has been expanding and business investment has picked up in recent quarters. Inflation continues to run below the committee’s 2% longer-run objective. The Fed also increased expectations for growth, projecting that the economy is on track to expand 2.5% this year and in 2018.

Our Take

Unemployment is low, growth is accelerating, and inflation remains muted. These factors contributed to the Fed’s higher growth projection for next year. Despite the higher projections, the Fed maintained its outlook for three rate increases next year, while remaining committed to its data-dependent stance when it comes to any decision on future rate increases.


Inflation

Producer prices rose 0.4% in November and are up 3.1% over the past year. Consumer prices also rose 0.4% in November, though core prices rose just 0.1%. Year-over-year, consumer prices have risen 2.2%.

Our Take

Energy price hikes explained a large portion of the November uptick in inflation. While there is some evidence of wholesale inflation, core consumer prices are up just 1.7% over the past year, below the Fed’s 2% target. Realized inflation has consistently come in below the Fed’s inflation expectations, and has yet to take hold in any meaningful way.


Retail Sales

November retail sales rose 0.8%, dramatically outperforming expectations. October retail sales were revised higher, up to 0.5% from 0.2%.

Our Take

Strong retail sales bode well for fourth quarter GDP. A solid holiday season would point toward economic growth exceeding 3%.


Municipals

Lawmakers continue to work on reconciling the House and Senate versions of the tax bill, including addressing private activity bonds. Under the House version, private activity bonds, stadium bonds, and advance refunding bonds would lose their tax exempt status. The Senate version only included advance refunding bonds. House Ways and Means Chairman Kevin Brady stated this week, “I think there’s agreement that private activity bonds can play an important role.”

Our Take

As lawmakers hash out the details and work on a compromise, certain parts of the House and Senate bill will be changed. Many believe that the tax exempt status of private activity bonds will be saved, as 39 House Republicans told their party’s leaders in a letter this week that the bonds are important for infrastructure development and investment. It is possible that the final version could include tax exempt status for some private activity bonds and eliminate others.