Unwinding at the Federal Reserve
At the FOMC meeting last week the committee announced its plans to initiate balance sheet normalization. The unwinding of the $4.58 trillion assets will begin in October (Federal Reserve). The initial plan is to decrease by $10 billion each month for the first 3 months (Federal Reserve). After every quarter, the committee will decide based on economic conditions to increase unwinding up to $50 billion/month (Federal Reserve). Short term shocks to the system like natural disasters will not affect policy decisions. The normalization process will take 5 to 7 years according to projections (Federal Reserve). The normalization process will start to unwind its $1.77 trillion in mortgage backed securities (Federal Reserve). This process is intended to give the reserve the ability to deal with major economic turmoil in the future.
Along with balance sheet normalization, the open market committee continues to normalize short term interest rates. Currently, the 3 month interest rate is 1.25 percent (Federal Reserve). The committee maintains a target rate between 1 – 1.25 percent (Federal Reserve).
The committee seems to diverge over the Federal Funds rate between 2018 and 2020. Each dot on the chart above represents one vote by a committee member. The committee’s midpoint for the fed funds rate in 2018 is 2.25 percent, 2019 is between 2.5 and 3 percent, and 2020 is 2.9 percent with a scattered range between 2.25 and 3.5 percent (Federal Reserve).
Proposed Tax Overhaul
Benjamin Franklin once said there are two things certain in life – “Death and Taxes.” This still holds true in today’s society, but the complication of taxes has grown over the centuries since this quote by one of our founding fathers. On Wednesday, tax reform framework by President Trump laid out four major concepts to renovate the tax code: simpler/easy to understand, pay raise to American workers, level the playing field for all American businesses, and reinvest trillions back into the American economy (Trump Administration). Many of the goals highlighted within the press release are similar to historical guidelines given by the Trump Administration. Some of the goals include consolidation of tax brackets into 3 brackets: 12 percent, 25 percent, and 35 percent; removal of estate tax, expensing of capital expenditures for businesses, and modernizing code for specific industries (Trump Administration)
These guidelines will continue to further discussions within the House and the Senate. There will likely be pushback from both sides over the removal of the state/local tax deduction (Anna Edgerton). Many large, urban districts depend on this deduction to lower their federal tax rates, but this is likely to be contested on both sides of the political aisle (Anna Edgerton).
Compiled by the Camelot Portfolios Investment Committee
Darren Munn, CFA, Chief Investment Officer
Eric Kartman, Research
Drew Steinman, CPA, Trader/Research
Zach Hartenburg, Analyst
Frank Echelmeyer, MBA, CKA®, Advisor Consultant
-for Broker/Dealer and RIA use only-
Anna Edgerton, Ben Brody, and Sahil Kapur. "GOP Tax Plan Will Set Up Fight Over Top Earner Tax Rate." September 2017. Bloomberg. 2017.
Federal Reserve. "Press Release." September 2017. 2017.
Trump Administration. "Tax Reform." September 2017. 2017.
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