FIG Topics of Interest



Lewis Alexander, chief economist at Nomura Securities International Inc., and Greg Daco, Oxford Economics’ chief U.S. economist, were among those who now see four Fed rate hikes in 2018 instead of three, according to a Bloomberg survey of 29 respondents conducted Feb. 12-14. That brought the survey’s median estimate for the upper bound of the central bank’s federal funds rate target to 2.5 percent by year-end. It is currently at 1.5 percent. 

“Stronger growth and higher inflation would increase the odds of four Fed rate hikes in 2018,” Daco said in his survey comments. He added that the recent market strains won’t prevent a rate increase at the central bank’s next policy-making meeting on March 20-21.

In their last quarterly projection in December, Fed officials penciled in three rate hikes for this year, according to the median forecast in their so-called dot plot. They tacitly reiterated that view at their Jan. 30-31 meeting, when they said they expected “further gradual increases in the federal funds rate.”

Economists are getting more upbeat about economic growth this year and next, according to the survey. They see gross domestic product expanding 2.9 percent in 2018 and 2.5 percent next year. GDP has averaged a 2.2 percent advance since the expansion began in mid-2009.

“Too much of a good thing is too much,” Joel Naroff, president of Naroff Economic Advisors Inc., said in his survey response. “The tax cuts, spending increases and potentially infrastructure package are likely to accelerate inflation and cause the Fed to raise rates higher and faster than expected.”

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“Carried interest was a key litmus test of whether the bill can be called tax reform, and it failed,” Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center in Washington, said of the tax overhaul passed in December. “This legislation was a Swiss cheese.”
Under pressure from industry lobbyists and exploiting a split among White House advisers, the Republican Congress in December failed to fulfill Trump’s promise to end the tax windfall enjoyed by money managers. And lawmakers may have stumbled in trying to narrow their tax advantage, writing the new carried-interest rule in a way that provides firms an easy escape.

The rule requires hedge funds and private-equity players to hold investments for at least three years to get the lower capital gains rate, rather than one year under the old law. Otherwise, they must pay the higher income tax rate.

The rule, however, exempts carried interest from the longer holding period when it’s paid to a corporation rather than an individual. To the surprise of legal and accounting experts, the law didn’t specify that it applied solely to regular corporations, whose income is subject to double taxation.

Hedge funds are preparing to exploit the wording: Managers are betting that by simply putting their carried interest in a single-member LLC -- and then electing to have it treated as an S corporation -- the profit will qualify for the exemption from the three-year holding period and be taxed at the lower rate. The maneuver by money managers contributed to a 19 percent jump in the number of LLCs incorporated during December in Delaware.

“It’s a total end-run around the statute,” said Anthony Tuths, a tax principal in the alternative investment unit of KPMG’s New York office. The Delaware filings “spiked through the roof because all these fund managers set up single-member LLCs,” said Tuths, adding that he doesn’t endorse the strategy because the government could still close the loophole.

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The amount on the largest banks' books for construction and development, multifamily and nonresidential loans were all down at the end of January compared to year end, according to weekly Federal Reserve Bank data. This was the first time all three have dropped in the same month since the Federal Reserve started tracking the individual categories in January 2015.
Leading the decline was a $2.7 billion drop in nonfarm, nonresidential loans - an annualized decline of more than 7.5%. This is fifth consecutive month the category has shrunk and the seventh time in the last eight months. It was the largest month-to-month decline. Over the last eight months, the amount of nonresidential commercial loans has dropped by $7.6 billion. 

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The White House will unveil its long-awaited infrastructure plan on Monday, fulfilling a signature campaign promise of President Donald Trump. The proposal includes $200 billion in federal infrastructure spending over a decade, which would be paid for through cuts elsewhere in the budget.
The largest single piece of the White House plan is a proposed $100 billion that would be made available to states and municipalities in the form of matching funds for infrastructure projects, according to White House officials who spoke to the press on background over the weekend. Federal funding, however, would be capped at 20 percent of the overall cost of any given project, leaving cities and states responsible for raising the other 80 percent.

Officials said the plan is designed to stimulate $1.5 trillion in new infrastructure investment, but they did not weigh in on how states and cities would raise the other eighty percent of the funds for new projects.

The proposal also includes $50 billion for rural infrastructure projects, which would be distributed to states in the form of block grants. Twenty billion would also be set aside to finance cutting-edge projects deemed too risky to qualify for traditional funding, but which have the potential to be transformative if they succeed. Another $20 billion would go to expanding current loan programs for public-private partnerships.

According to the White House, one particular financing program, known as TIFIA, leverages each dollar of federal money into an average of $40 from other sources. So by this rationale, an additional $20 billion for TIFIA financing programs would be expected to produce $800 billion in new infrastructure investment.

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The Senate is poised to pass a bipartisan budget deal Thursday that would avert a government shutdown and suspend the federal debt ceiling, but the bill faces less certain prospects in the House, where the chamber’s top Democrat and GOP conservatives are raising objections.
The mood in the House was in stark contrast to the comity in the Senate, where Majority Leader Mitch McConnell and Democratic leader Chuck Schumer delivered laudatory back-to-back speeches on the accord, which would add nearly $300 billion for government programs and suspend the debt ceiling until March 2019.

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The short-term spending bill passed by the House to avoid a government shutdown this Friday may get replaced with a longer-term budget plan that raises spending caps for defense and domestic programs if congressional leaders can wrap up a deal in the next two days.

The House bill, passed 245-182 Tuesday, would keep the government open only until March 23 while funding the Pentagon through September. But Republican and Democratic leaders in both chambers are working on a two-year budget plan that -- if that comes together -- may be combined with other important but stalled measures, including lifting the federal debt ceiling and hurricane disaster aid.
Current government funding runs out at the end of the day Thursday. Senate leaders said they don’t want to bring the government to the brink of a shutdown and see little risk that it would occur. Last month, the government was closed for three days after Democrats demanded action on immigration legislation. The threat of another hang-up dissipated after Senate Majority Leader Mitch McConnell agreed to an open debate on immigration.

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About $157 billion of Apple’s $285 billion in cash, mostly held overseas, is invested in corporate debt, making it a leading lender. The cutback in buying, echoed by other tech firms with sizable overseas holdings, such as Alphabet Inc. and Oracle Corp., could have an impact on corporate borrowing costs.
The tech companies have started sitting out bond deals this year as they look to trim their holdings, said the people, who asked not to be identified because the information isn’t public. U.S. companies with savings held offshore will likely move them home or use them by 2020, Credit Suisse analyst Zoltan Pozsar wrote in a Jan. 29 report.

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High-Powered Advice for the Incoming Fed Chairman...

Alan Blinder - “What I would do if I ran the world would be to make the inflation target a range of 1-1/2 to 2-1/2 percent.”
Martin Feldstein- “(There should be) a shift in focus to include financial stability as a key determinant of what the Fed is trying to do with its monetary policy.”
Kristin Forbes- “I would actually put a priority on thinking more about macro prudential policy and how it can be used to address financial stability concerns.”
Austan Goolsbee- If they’re debating how far should we tighten when everyone else in the world is saying, ‘Let’s not tighten or let’s even loosen,’ the U.S. has got to be at last a little circumspect about whether we are truly out of the woods.
Laurence Meyer- “I would have better communication about the meaning of the symmetric inflation objective.”
Frederic Mishkin- “The Fed and other central banks should commit to an average inflation rate of 2 percent…But they do it over a fixed period of years, say five years.” 
Athanasios Orphanides- “I’m very much in favor of (Stanford University professor) John Taylor’s proposal for the Fed coming up on its own with a simple rule that would make its policy framework even more transparent.”
Charles Plosser- “They need to settle on an operating regime and on what they’re going to do with the balance sheet and they need to communicate that to the public.”
Adam Posen- “There will be pressure on you to hike rates before wage inflation goes up, to tighten financial conditions before the next bubble emerges, to show your hawkish credibility, and, as a new CEO, to establish a new targeting regime. Resist all of these pressures.”
Lawrence Summers- The core strategy of the industrial world in responding to recessions for the last 40 years has been rate cuts by central banks of 500 basis points. There’s going to be nothing like that level of room the next time… How are we going to respond to that needs to be a great concern.

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"I believe low volatility to be the result of years of monumental liquidity injections by major central banks and their reflexive effect on investors' behavior and the buy-the-dip mentality, expecting central banks to hold their back," Francesco Filia, chief executive officer of Fasanara Capital, told CNBC via email.
"Low volatility may eventually prove to be a trap for markets, when the tide turns, suddenly revealing the pressure cooker it led investors into," Filia said.

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“Without real federal funding to address the huge backlog of desperately needed improvements to the nation’s roads, bridges, public transit, airports, water systems, and other critical assets, it’s an empty promise,” Dave Raymond, president and chief executive of the American Council of Engineering Companies, said in a statement.


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