Week In Review
This week the Federal Reserve Open Market Committee (FOMC) met for the first time with Jerome Powell as Fed chairman. As expected, the committee announced an increase in the federal funds rate to a target range of 1.50% to 1.75%. According to the Fed statement, the labor market continued to strengthen and economic activity has been “rising at a moderate rate.” The committee noted that both household spending and business investment have moderated from strong fourth quarter readings. Inflation continues to run below the committee’s 2% longer-run objective. The Fed stated that economic expectations have strengthened in recent months and increased its growth projection for 2018 to 2.7%, up from 2.5% from the December meeting.
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 this year while remaining committed to its data-dependent stance when it comes to any decision on future rate increases.
The Trump administration announced tariffs on $50 billion worth of Chinese imports in response to China’s intellectual property abuses of U.S. firms operating in China. These tariffs will be focused on aerospace, information and communications goods, and machinery. Trump also directed Treasury Secretary Mnuchin to propose new restrictions on Chinese companies’ investments in the U.S. China imposed tariffs on $3 billion of imports from the U.S. in response to the earlier steel and aluminum tariffs. Equity markets worldwide sold off sharply in response to the expansion of trade restrictions and the Chinese retaliation. The Chinese government intervened in their stock market to support prices.
The expansion of trade and investment restrictions and the fact that the Chinese are now retaliating is cause for concern that the U.S. and China are slipping toward a trade war. Reversing the past few decades’ progress toward freer trade and capital flows would reduce global economic growth and living standards. For now, the Chinese are speaking out harshly, filing complaints with the WTO, and taking only token actions. If they are unable to negotiate a satisfactory outcome, China has the ability to take actions that would significantly impact the U.S. economy and U.S. exporters.
Orders for durable goods increased 3.1% in February, significantly outperforming expectations for a 1.6% increase. Orders excluding the volatile transportation sector increased by 1.6%.
February’s large increase in orders is likely a result of reversing most of January’s 3.6% decline. That said, tax cuts may have also played a role as corporations decide how to spend their tax windfalls. Recent tariffs could put a damper on future orders though, as uncertainty typically breeds restraint in spending.
Louisiana lawmakers continue to disagree on how to handle the state’s budget woes. This week Lance Harris, a House Republican, proposed paying $150 million to the managed care companies who work with Medicaid patients this year, leaving only 11 months of payments for next year. Lawmakers have been unable to agree on a budget for the next fiscal year, which begins on July 1, and next year’s budget gap is expected to reach almost $700 million.
Louisiana is struggling with a budget gap for next year, as a sales tax increase expires on July 1 and the state continues to recover from the fall in oil prices in previous years. Republican lawmakers and Democratic Governor John Bel Edwards have been unable to reach a compromise, even after five special legislative sessions. Representative Harris’ prepayment suggestion would help to close some of the gap temporarily but is not a long-term fix. Louisiana could face a ratings downgrade if lawmakers are unable to compromise and the budget gap remains.