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September
29
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Week In Review

Yellen Speaks

This week, Fed Chair Janet Yellen spoke at the National Association for Business Economics in Cleveland. During her remarks, Yellen defended the Fed’s plan of gradually increasing its target rate despite unexpectedly low inflation in the last few months. She stated that the FOMC may have “misjudged” both the strength of the labor market and long-run inflation expectations. Further, she conceded the Fed may need to slow accommodations, while noting it “should be wary of moving too slowly.” Yellen also noted that it would be “imprudent to keep monetary policy on hold until inflation is back to 2%.”

Our Take

Inflation has been running persistently below the Fed’s 2% target, puzzling economists and causing policymakers to be hesitant about raising rates. The Fed clearly recognizes its difficult position. Removing liquidity too slowly will lead to inflation. Removing liquidity too quickly will slow the economy, risking recession. In the end, the Fed remains committed to gradual increases in interest rates despite the mysterious lack of inflation, noting it could always slow its pace if inflation remains elusive.


Germany

The German elections resulted in Merkel’s party receiving a plurality of seats in the Bundestag with the Social Democrats (SPD) receiving the second most, but both of these parties lost a significant number of seats. The populist Alternative for Deutschland (AfD) saw the most significant electoral gains and will enter the Bundestag for the first time. The SPD’s leader has stated that the party will not form another coalition with Merkel’s party, and Merkel has ruled out a coalition including AfD. In order to form a majority government without the SPD, Merkel’s party will have to form a coalition with the free-market focused FPD and the environmentally focused Greens.

Our Take

Merkel will most likely be able to bring together a majority coalition, and there is a chance that the SPD would partner with Merkel’s party. However, governing Germany will be more difficult following this election. The populist sentiments that motivated Brexit, the Five-Star Movement in Italy, and Marine LePen’s strong showing in France are alive and well in Europe, including in Germany.


Municipals

Puerto Rico continues to struggle with the aftermath of Hurricanes Irma and Maria. It was reported that the island’s federal overseers also plan to reassess Puerto Rico’s fiscal plan this week. Many financial assumptions that were made before the hurricanes hit are no longer valid due to damage sustained.

Our Take

First and foremost, Puerto Rico must deal with its humanitarian crisis. Government officials are still assessing the damage and needs of the island’s residents. The hurricanes will deepen Puerto Rico’s fiscal crisis and it will take time to know the full economic impact of the storms.