4 Reasons the Fed Won’t Raise Interest Rates in June
It is no surprise that the Fed didn’t take action on interest rates at the April Federal Open Market Committee meeting. The question of interest to the market is whether the Federal Reserve has revealed some clear signal in its statement about the timing of the future rate increase. Even though the Fed did not change its forward guidance on rate increases from the March statement, we can discern what the Fed has on its plate. Four aspects of the economy stand out:
Related: Bernanke Was Right—Interest Rates Aren’t Going Anywhere
- The latest GDP data show worse-than-expected growth at an annualized 0.2 percent during the first quarter of 2015, compared to 2.2 percent in the last quarter of 2014.
- The strong U.S. dollar has continued to weigh on exports. Net exports in the first quarter stayed unchanged (0.0 percent growth) year-over-year, compared with 18.6 percent growth in the fourth quarter of 2014.
- Inflation has continued to stay way below the central bank’s 2 percent target. The price index for personal consumption expenditure (PCE), the measure of inflation preferred by the Fed, showed a 0.3 percent year-over-year increase in the first quarter, much lower than the growth rate of 1.1 percent in the fourth quarter of last year. Core PCE inflation, which excludes volatile prices of food and energy, reached 1.3 percent, compared with 1.4 percent in the last quarter.
- The improvements in the labor market, the other mandate of the Federal Reserve besides inflation, also slowed. Only 126,000 employees were added to nonfarm payrolls in March, compared to 264,000 in February and 201,000 in January.
Related: Fed’s Downgrade of Economic Outlooks Signals Later Rates Lift-Off
In all, the U.S. economy is growing more slowly than anticipated with some headwinds that may last for a while, such as the strong dollar. Both measures of the Fed’s dual mandate, price stability and maximum employment, remain below the Fed’s target. Normally this would call for an accommodative monetary policy, postponing the rate increases until later in the year. Rather than starting rate increases at the June FOMC meeting, the liftoff in September instead is more likely.
This story originally appeared at the American Institute for Economic Research.
Tweet of the Day: The Black Hole of Big Pharma
Billionaire John D. Arnold, a former energy trader and hedge fund manager turned philanthropist with a focus on health care, says Big Pharma appears to have a powerful hold on members of Congress.
Arnold pointed out that PhRMA, the main pharmaceutical industry lobbying group, had revenues of $459 million in 2018, and that total lobbying on behalf of the sector probably came to about $1 billion last year. “I guess $1 bil each year is an intractable force in our political system,” he concluded.
Warren’s Taxes Could Add Up to More Than 100%
The Wall Street Journal’s Richard Rubin says Elizabeth Warren’s proposed taxes could claim more than 100% of income for some wealthy investors. Here’s an example Rubin discussed Friday:
“Consider a billionaire with a $1,000 investment who earns a 6% return, or $60, received as a capital gain, dividend or interest. If all of Ms. Warren’s taxes are implemented, he could owe 58.2% of that, or $35 in federal tax. Plus, his entire investment would incur a 6% wealth tax, i.e., at least $60. The result: taxes as high as $95 on income of $60 for a combined tax rate of 158%.”
In Rubin’s back-of-the-envelope analysis, an investor worth $2 billion would need to achieve a return of more than 10% in order to see any net gain after taxes. Rubin notes that actual tax bills would likely vary considerably depending on things like location, rates of return, and as-yet-undefined policy details. But tax rates exceeding 100% would not be unusual, especially for billionaires.
Biden Proposes $1.3 Trillion Infrastructure Plan
Joe Biden on Thursday put out a $1.3 trillion infrastructure proposal. The 10-year “Plan to Invest in Middle Class Competitiveness” calls for investments to revitalize the nation’s roads, highways and bridges, speed the adoption of electric vehicles, launch a “second great railroad revolution” and make U.S. airports the best in the world.
“The infrastructure plan Joe Biden released Thursday morning is heavy on high-speed rail, transit, biking and other items that Barack Obama championed during his presidency — along with a complete lack of specifics on how he plans to pay for it all,” Politico’s Tanya Snyder wrote. Biden’s campaign site says that every cent of the $1.3 trillion would be paid for by reversing the 2017 corporate tax cuts, closing tax loopholes, cracking down on tax evasion and ending fossil-fuel subsidies.
Read more about Biden’s plan at Politico.
Number of the Day: 18 Million
There were 18 million military veterans in the United States in 2018, according to the Census Bureau. That figure includes 485,000 World War II vets, 1.3 million who served in the Korean War, 6.4 million from the Vietnam War era, 3.8 million from the first Gulf War and another 3.8 million since 9/11. We join with the rest of the country today in thanking them for their service.
Chart of the Day: Dem Candidates Face Their Own Tax Plans
Democratic presidential candidates are proposing a variety of new taxes to pay for their preferred social programs. Bloomberg’s Laura Davison and Misyrlena Egkolfopoulou took a look at how the top four candidates would fare under their own tax proposals.
