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January
11
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Week In Review

FOMC Minutes

This week the Federal Reserve Open Market Committee (FOMC) released the minutes from its December meeting. The minutes show the Fed members judged that some further gradual rate increases would most likely be consistent with a sustained economic expansion, strong labor market, and inflation near its 2% objective. Participants noted that recent developments, including increasing concerns about global growth and the volatility in financial markets, made the appropriate extent and timing of future policy firming “less clear.” Against this backdrop, many participants believe that the committee could afford to be patient about further rate increases, especially in an environment of muted inflation pressures.

Our Take

The minutes confirm what Chairman Powell made clear in last week’s speech at the American Economic Association conference. Monetary policy is not on a preset course. Neither the pace nor the ultimate endpoint of future rate increases is known. The Fed remains data dependent and will adjust its gradual path of rate increases as needed.


China

Mid-level trade talks between the U.S. and China were extended an additional day, and both sides expressed that progress was made during the talks. Talks between senior level officials are scheduled for later this month. Risk assets rallied on this news.

Our Take

It is good that the two sides are talking and that both seem to be interested in reaching a deal to end the current trade dispute. While progress is being made on the trade balance and holding off on some tariffs, the two sides have not yet begun to address the forced technology transfer and state subsidy issues that are at the core of the current disagreement. This will have to wait for the more senior level talks.


Inflation

December CPI fell 0.1%. Core consumer prices, excluding food and energy, rose 0.2%. In 2018, CPI rose 1.9%, while core CPI increased 2.2%.

Our Take

Inflation remains subdued, hovering around the Fed’s 2% target. All else equal, continued benign inflation reports will allow the Fed some room to delay further tightening.


Brexit

The UK Parliament passed an amendment that will require the government to present a Brexit plan within three sitting days of the defeat of the current deal in Parliament. This amendment is an effort to keep May from running out the clock to a no-deal Brexit if the current deal is defeated next Tuesday.

Our Take

Parliament has severely hampered May’s ability to use the threat of a no-deal Brexit as leverage to gain support for the current deal, and this makes the current deal’s defeat next Tuesday even more likely.


Municipals

California Governor Gavin Newsom released a $144 billion budget proposal for the next fiscal year, which is slightly larger than the current fiscal year’s budget of $139 billion. Included in the budget is almost $14 billion to pay down debt and pension liabilities, along with additional funding for the state’s reserves. In addition, California is projected to have a $21.4 billion surplus. The fiscal year will start on July 1. Lawmakers have until June 15 to approve a balanced budget.

Our Take

Newly-elected Governor Newsom has vowed to follow former Governor Jerry Brown’s lead in building up the state’s reserve fund and paying down debt. California has successfully taken steps to improve its fiscal health as the state has recovered from the recession. A growing reserve fund will help provide a cushion in the event of an economic downturn in the future.