Pro Perspectives 2/28/23

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February 28, 2023
Let's take a look back at July 27th, and discuss how it relates to today's Supreme Court hearing on Biden's student debt forgiveness plan. 
As you may recall, the Fed met on July 27th, and raised rates by 75 basis points. This was the second consecutive 75 basis point hike, and it left the Fed Funds rate in the range of 2.25%-2.50%. 
If we look back at the prior tightening cycle (2015-2018), that's right around the level where the Fed was forced to stop and reverse on their tightening campaign, as things started breaking in the financial system.  And, indeed, on July 27th, it was already known that the level of global rates (led by the Fed) were putting stress on the financial system (the European Central Bank had to intervene to fix the European sovereign debt market a month earlier).
With that, and with the stock market having already been slashed by 20%, and with the bubbles in the economy having been pricked, Jerome Powell (Fed Chair) called the Fed Funds rate of 2.25%-2.50% NEUTRAL (i.e. not accommodative nor restrictive of economic activity).  
And he said they would no longer "guide" on policy, but take things meeting by meeting, dependent on the data.
This was a signal that had done enough:  time to sit back and watch.
Then the data changed, dramatically, the same day.
The Senate voted to approve the Chips Act.  That was well telegraphed.  But then the controlling party of Congress surprisingly announced a reconciliation process to ram home the remainder needed to fund the "Build Back Better" agenda.  In total, by late afternoon, the Fed was now looking at another $680 billion of new spending – poured on top of an inflation problem they thought they had a handle on.   
Then, the same day, the White House telegraphed Biden's intention to greenlight, by executive order, his plan to cancel student debt. That's potentially another half a trillion-dollars of consumer liabilities that could be turned into consumption. 
So, the Fed was forced to, not only quickly walk back on the "neutral" proclamation, but they went on full verbal attack on jobs and the economy (and therefore, inflation) over the next month.  Stocks took another, deeper plunge.  
So, fast forward a few months, and by November a Federal judge had struck down the student loan plan as unlawful.  That was good news for the inflation picture. 
Now the decision sits with the Supreme Court, and reports from AP tonight suggest they will rule against it.  Bad news if you were hoping to have your liabilities wiped clean.  Good news if you want a chance at stable inflation and strong economic growth.
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