06|01|2017

Fed in Focus

The year started with great promise and has so far delivered. Can it keep progressing at this pace?

 

The year started with promise in the way of a fully aligned government focused on fiscal stimulus. There was hope of tax reform, financial deregulation, healthcare reform, and infrastructure spending. Everyone was on board, including the Federal Reserve Board (FRB) who has stepped up monetary tightening in 2017.

 

In recent months, the initial failure of the AHCA slowed progress and tax reform is becoming increasingly more difficult as a method of paying for reforms has stalled. As more and more of the hope from the start of the year fades, the market pace of growth has slowed, but still it progresses.

 

The struggle is that inflation, a major agenda item of the FRB, has started to slow and without fiscal stimulus showing promise the FRB should be slowing their pace of monetary tightening. Rather, they recently announced plans to begin a reduction of the balance sheet which would be another form of monetary tightening.

 

Should the FRB stay the course on tightening and the government fail to deliver on fiscal stimulus, we could see earnings pressure ensue as consumer spending fades.

 

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