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Week In Review

FOMC Minutes

The Federal Reserve Open Market Committee (FOMC) released the minutes from its May 3 meeting. The minutes show a general consensus among members toward continued tightening of monetary policy with one or two additional rate hikes this year. The committee judged that the next rate hike would be appropriate “soon.” In addition, the minutes reveal a potential framework to address the central bank’s $4.5 trillion balance sheet. The Fed does not want to sell the assets on its balance sheet, preferring to let it shrink as the securities mature. The plan would end the reinvestment of principal of maturing securities in modest, ever-increasing stages. Provided the economy continues to perform as expected, most participants thought it would be appropriate to begin shrinking the balance sheet before year-end.

Our Take

It appears that rates are likely to increase at the June meeting and the balance sheet run-off will start later this year. The willingness to address the balance sheet is encouraging. The Fed has put a staggering amount of money into the system, and normalizing monetary policy from here will prove to be difficult.

U.S. Economic Data

First quarter GDP growth was revised up to 1.2% from 0.7% as a result of increases in consumer spending, utility consumption, and some areas of business investment. April durable goods orders and shipments fell.

Our Take

Stronger than initially reported consumer spending is a welcome development and is consistent with the stronger labor market measures. May and June will need to see a recovery in business spending in order to maintain the economy’s growth trajectory.


Moody’s issued a surprise downgrade of China’s sovereign debt. The rating agency cited concerns about the continued growth of debt at an unsustainable pace even as growth slows.

Our Take

Moody’s is clearly not convinced of the Chinese government’s commitment to reduce leverage and financial system risk even if such efforts result in slower growth.

European Debt

Negotiations to get the IMF to join in the current Greek bailout program faltered when the modifications to Greek debt offered by the Eurozone governments were not enough to get the IMF to declare Greece’s debt sustainable. Many Eurozone governments have said that they will not release bailout funds until the IMF joins the program. Separately, in its semi-annual review, the ECB stated that debt-sustainability concerns have risen during the past six months due to the increased potential for higher yields.

Our Take

Both of these developments are symptoms of the issue of Eurozone economies with too much debt and no foreign-exchange mechanism to reduce the real value of that debt. While this issue has faded into the background recently, the fundamental problems are still present, and further confrontations between the core and the periphery are likely.


OPEC and its allies agreed to extend their production cuts to next March in order to bring inventories down to targeted levels. Crude prices dropped as the extension was announced.

Our Take

The capital markets were expecting more aggressive action from OPEC in order to address the inventory levels. Even if this extension of the current deal succeeds in bringing down inventories, it is unlikely that oil prices will rise to the levels that OPEC and its allies are seeking.


On Wednesday, the Chicago Board of Education approved borrowing close to $900 million. Almost $400 million will be in the form of a short-term loan backed by state grant payments that the city has not yet received. The board authorized $215 million of refunding bonds. The borrowing will provide funds needed to make a pension contribution on June 30, as well as funds needed for the beginning of the upcoming school year.

Our Take

The budget impasse in Springfield continues to affect municipalities and school districts across Illinois. The state owes Chicago Public Schools $467 million in grant payments, which the school district has not received. Without the borrowing approval, CPS warned that the district would run out of money before the end of the current school year. Illinois lawmakers must work to end the budget stalemate. Districts such as CPS cannot afford to borrow additional money as they wait to receive the delayed state aid.