Trying to make sense of the recent surge in inflation remained a key concern for investors in June. On June 25, the Bureau of Economic Analysis reported that the core personal consumption expenditures ("PCE") price index, which excludes volatile food and energy prices, rose 3.4% from a year ago. It was the biggest increase in that index since 1992.
Earlier in the month, the U.S. Bureau of Labor Statistics reported that the “headline” consumer price index, which does include food and energy prices, increased 5% in May, the fastest pace since August 2008. Still, the indexes may not fully capture all the ways price hikes are occurring and impacting consumers.
The financial markets, however, appear to be shrugging off these indications of inflation. The prevailing view seems to be that the surge in inflation will be transitory. It is being viewed as mostly the result of the economy reopening and “base effects,” as prices on items such as airline tickets, used cars, and oil rebounded after being depressed during the pandemic.
Fed signals rate hikes for 2023
The U.S. Federal Reserve (Fed) had been the primary proponent of the argument that higher inflation is a shorter-term phenomenon. But this month, the Federal Open Market Committee, after previously saying interest rate hikes were not likely until 2024, issued a surprise by forecasting it will raise rates twice in 2023.
In our view, the Fed’s stance on rates is not as hawkish as some observers are making it out to be. The central bank is still being very accommodative with monetary policy.
In a sign of confidence that the economy will eventually be on stronger footing, Fed Chair Jerome Powell said the Fed is “talking about talking about” tapering its bond-buying program that was designed to shore up the economy during the pandemic.
Addressing excess liquidity in short-term markets
The Fed did make two technical rate adjustments, raising the rate on reverse repurchase agreements by 5 basis points to 0.05%, and increasing the rate it pays on excess reserves by 0.05% to 0.15%. Both moves were taken to address excess liquidity in short-term money markets.
Bloomberg noted, in a June 16 article, that there is now $521-billion in the overnight Reverse Repurchase Agreement (“RRP”) facility. As the article stated, usage could increase as the “amount of cash in the system continues to balloon, with Fed asset purchases, fiscal stimulus payments, and a debt-ceiling related drawdown of the Treasury main account all contributing to the situation.”
While some have been critical of the actions the Fed has taken to preserve liquidity during the pandemic, Fed Chair Powell, in his press conference following this month’s FOMC meeting said, policymakers think the RRP facility is “doing what we think it’s supposed to do.”
Debate on enhanced unemployment benefits
The Labor Department reported that initial jobless claims for the week ended June 19 was 411,000, a decline of 7,000 from the previous week.
The good news came amid continuing debate about whether enhanced unemployment benefits are acting as a disincentive for people to return to work. Eight more states decided to end their enhanced unemployment benefits program – with the total now reaching 26 states – before federal cutoff dates for these enhanced benefits.
In testimony before Congress, Fed Chair Powell was asked to provide his view on extending the $600 enhanced benefit that came with the COVID-relief package and is set to expire on July 31. He said, “it probably is going to be important that it be continued in some form.”1 Powell also suggested that Congress remember some jobs, particularly those in the travel, leisure and hospitality, dining and entertainment industries, may not be coming back soon.
A revised infrastructure plan
On June 25, President Biden announced that he and key senators had reached an agreement to pass a bipartisan $953-billion infrastructure package. The proposal was forged during negotiations with five Senate Republicans and five Senate Democrats – including Senator Kyrsten Sinema of Arizona and Joe Manchin of West Virginia.
Senators Bernie Sanders of Vermont and Elizabeth Warren of Massachusetts, however, expressed concern that the compromise package did not go far enough and excluded certain priorities – like childcare and clean energy – that were part of the $2-trillion infrastructure package the Biden Administration had proposed in March.
The progressive Senators suggested the Senate consider a second infrastructure plan that could be passed through the reconciliation process, which would require only 51 votes for approval (the 50 Democratic Senators, plus Vice President Kamala Harris as the tiebreaker).
Kansas Republican Senator Jerry Moran said he would not support the bipartisan package unless Senators Sinema and Manchin came out against the second reconciliation package. With 11 Republicans originally onboard, the bipartisan package could have passed without using reconciliation.
With Senator Moran’s opposition, as well as that of Senator Lindsey Graham, who also objected to a secondary package, the votes for the bipartisan bill would fall below the 60-vote threshold needed to pass legislation without reconciliation.
Despite the initial promise of a bipartisan approach, passage of major infrastructure legislation is now much more in question.
G7 nations commit to a minimum corporate tax rate
The Group of Seven (G7) countries – Canada, France, Germany, Italy, Japan, the United Kingdom and the United States – held their annual summit in June, with England playing host this year.
One of the biggest commitments coming out of the summit was a pledge to levy a 15% global minimum corporate tax rate and to dissuade multinational companies from shifting their profits to low tax havens.
There was also an agreement to boost infrastructure investments in developing markets to challenge the inroads China is making with its Belt and Roads Initiative.
New head of FTC a concern for Big Tech
President Biden appointed Lina Khan as the new Chair of the Federal Trade Commission (FTC). The legal scholar, who has specialized in antitrust and competition laws, has been a vocal critic of Silicon Valley.
The new leadership of the FTC could have major implications for companies like Alphabet, Amazon, Apple, and Facebook.
The appointment comes when there are a number of antitrust legislative proposals brewing in Congress, including one that passed the House of Representatives with bipartisan support and would require these companies to shed certain businesses (like Facebook’s Instagram), severely restrict their ability to purchase competitors, and impose limits on the businesses they can run on their platforms.
Lina Khan was a counsel to the House subcommittee that drafted many of the key antitrust bills.
Mixed news on the legal front for antitrust efforts
In a major setback for the FTC’s antitrust efforts, on June 28 U.S. District Judge James Boasberg dismissed antitrust lawsuits brought the FTC and 46 states against Facebook.2 The judge said the FTC’s lawsuit was “legally insufficient” and did not plead enough allegations to support its claims of monopolization by Facebook. The cases brought by the states were dismissed on the grounds that the states’ attorneys general waited too long to file their claims. The FTC now has 30 days to file an amended lawsuit.
On June 29, Bloomberg reported that the Justice Department has stepped up its scrutiny of Google’s digital ad market practices, continuing a probe that had begun under the Trump administration.3
An investigation into banks’ handling of Archegos trades
This month, the Justice Department also announced it would investigate how global banks handled multibillion-dollar trades with Archegos Capital Management. The firm, run by Bill Hwang, defaulted on margin calls in March, bringing $10 billion in losses for big global banks, including Credit Suisse, Nomura Holdings, Morgan Stanley and Deutsche Bank. The default also caused a selloff in stocks like Disney and ViacomCBS when Archegos was forced to liquidate its positions.
The debacle could lead Congress to take action to curb risk-taking and prevent similar collapses. Measures legislators might consider to support those efforts could include taxing big bank’s use of leverage and limiting the use of total return swaps.
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