Town Hall, New Rules

Last night President Biden held a town hall in Baltimore, offering updated insights into his policy agenda and recent negotiations with Democrats. The President highlighted the need to move forward with his spending initiatives, which include expanding the social safety net and combating climate change, however, Biden also recognized the barriers he faces in his own party. West Virginia's Joe Manchin and Arizona's Kyrsten Sinema, for example, have both cited concerns over massive spending initiatives and tax increases. Nevertheless, the President was optimistic a framework agreement could be reached in a matter of weeks.

As negotiations continue, the topline for the package has been reduced from $3.5T to around $2T. While Biden has been clear he will not support a work requirement for the child tax credit, the paid parental leave provision has reportedly been narrowed down from 12 weeks to 4 weeks, an earlier proposal to make community college free would be eliminated, and money slated for clean energy programs has been reduced.

Paying for even the reduced version of the bill, however, remains a concern as the President acknowledged last night corporate tax hikes may not be part of the offsetting revenue.?"I don't think we're going to be able to get the vote,"?he declared. "Look, when you're in the United States Senate and you're president of the United States and you have 50 Democrats, everyone is the president."

Stimulus measures were very much at the heart of the robust rebound in the first half of the year and going forward as stimulus wanes the economic recovery will expectedly slow. For some officials, this reduced pace of activity is justification for further government expenditures in the name of growth and job creation. And while further fiscal outlays would likely boost GDP in the near term, continued government spending and debt creation will also come at a longer-term cost, further exacerbating inflation, not to mention undermining investment and hiring. So while growth is likely to slow from 6.5% to a range of 3-4% in the back half, it will likely be a more organic, more sustainable composition of growth with a reduced government presence.

At the Fed, amid a cloud of controversy over individual financial transactions, a new rule has been issued banning Federal Reserve officials from buying individual securities. The new edict comes as Chairman Jerome Powell is the latest Fed official to be targeted because of individual financial transactions. Earlier this week,?The American Prospect?reported that Powell sold up to $5M in a broad index fund as the economy was recovering from the pandemic last year.

Recall, last month, Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren left their positions on the Committee after trades were seen as?“controversial.”?Robert Kaplan, for example, made several million-dollar-plus stock trades, while Eric Rosengren reportedly made substantial investments in real estate, an industry he had publicly commented on. Dallas Fed President Robert Kaplan resigned his post on October 8 and acknowledged in a statement released by the bank that his stock trading distracted from the Federal Reserve’s work. Meanwhile, Federal Reserve Bank of Boston President Eric Rosengren retired on September 30, about nine months early, citing, however, health reasons.

Now in all cases, these transactions appear to be well within official guidelines – they were reported, reviewed and essentially approved. Remember, Fed officials just like other federal employees are subject to stringent rules when it comes to financial transactions. Although, to be fair other officials don’t have the power to manipulate monetary policy and thus, by extension, have direct influence over markets. So of course, the argument being, Fed officials should be held to an even higher standard.

In any case, the mere appearance of impropriety or inappropriate behavior undermines the Fed’s credibility at a time when the economy is arguably at the discretion of officials to approve policy to navigate the economy back to normal. The Chairman himself also faces an uncertain re-nomination. Those opposed to his re-nomination will no doubt use this latest controversy as further justification for the Biden administration to usher in new leadership at the central bank.?

"To help guard against even the appearance of any conflict of interest in the timing of investment decisions, policymakers and senior staff generally will be required to provide 45 days advance notice for purchases and sales of securities, obtain prior approval for purchases and sales of securities, and hold investments for at least one year. Further, no purchases or sales will be allowed during periods of heightened financial market stress."

-????????Federal Reserve Press Release, October 21, 2021

Yesterday, initial jobless claims unexpectedly fell 6k from 296k to 290k in the week ending October 16, the second consecutive week claims were below 300k since the pandemic began. According to?Bloomberg, jobless claims were expected to rise to 297k.?

Continuing claims, meanwhile, or the total number of Americans claiming ongoing unemployment benefits, dropped from 2.603M to 2.481M in the week ending October 9.

Also, the Philly Fed Index fell from 30.7 to a reading of 23.8 in October, more than the expected decline to 25.0, according to?Bloomberg?and a two-month low. In the details of the report, employment rose from 26.3 to 30.7, and new orders increased from 15.9 to 30.8, a five-month high. Also, prices paid rose three points to 70.3, and shipments increased from 29.9 to 30.0 in October, a one-year high. On the other hand, prices received declined from 52.9 to 51.1, a three-month low.

Additionally yesterday, existing home sales jumped 7.0% from 5.88m to 6.29m in September, an eight-month high. According to?Bloomberg, existing home sales were expected to rise 3.7% at the end of Q3. In the details, single family sales rose 7.7% and multi-family sales increased 1.4%. Year-over-year, however, existing home sales fell 2.3% in September, the second consecutive month of decline. Due to a rise in sales, the months’ supply of existing homes declined from 2.6 months to 2.4 months, the lowest level since April. From a price standpoint, the median cost of a previously owned home rose 13.3% in September from a year earlier to $353k.

Finally yesterday, the Leading Index rose 0.2% in September, half the rise expected and the weakest pace in seven months.

This morning, the economic calendar is empty.

Next week’s key economic releases include:

On Tuesday, new home sales are expected to rise 2.4% in September following a 1.5% gain the month prior.

On Wednesday, durable goods orders are expected to decline 1.0% in September following a 1.8% increase in August.

On Thursday, initial jobless claims are expected to rise from 290k to 294k in the week ending October 23, and GDP is expected to rise 2.4% in the third quarter, down from the 6.7% pace reported in the second quarter.

Finally, on Friday, the PCE is expected to rise 0.3% in September and 4.4% over the past 12 months, up from the 4.3% annual pace reported in August. Excluding food and energy costs, the core PCE is expected to rise 0.2% in September and 3.7% year-over-year, also up from the 3.6% annual pace reported in August.

-Lindsey Piegza, Ph.D., Chief Economist