The Federal Reserve's $2.5tn Question: Navigating a Complex Economic Landscape

The Federal Reserve of the United States has been at the forefront of efforts to support the economy during the COVID-19 pandemic. One of the main tools the Fed has used to achieve this goal is the expansion of its balance sheet, which has grown to an unprecedented $2.5tn. The massive increase in the Fed's assets presents both opportunities and challenges for the central bank as it navigates the economic landscape. One of the primary challenges the Fed faces is determining the appropriate size for its balance sheet in the post-pandemic era. The central bank has been purchasing large amounts of Treasury bonds and mortgage-backed securities to support the economy, but at some point, it will need to start shrinking its balance sheet to prevent inflation and maintain stability in the financial markets. However, there is no clear consensus on the optimal size for the Fed's balance sheet. Some economists argue that the central bank should maintain a larger balance sheet to ensure that it has the necessary resources to respond to future economic crises. Others believe that the Fed should shrink its balance sheet as soon as possible to prevent the risk of inflation. The Federal Reserve is facing a complex economic landscape, and the $2.5tn question of how to manage its balance sheet is a critical issue that will have far-reaching implications for the economy and the financial markets. The central bank must weigh the risks and benefits of different options and make decisions that will promote stability, support economic growth, and maintain public confidence in the monetary system. Do you believe the Fed should reduce its balance sheet, or maintain the current balance sheet? 

Article: https://www.economist.com/finance-and-economics/2023/02/09/the-federal-reserves-25trn-question

Disney to cut 7,000 jobs and slash $5.5 billion in costs as it unveils vast restructuring

Disney is planning to reorganize into three separate divisions -- Disney Entertainment (streaming/media operations), ESPN Division(TV network/ESPN+), and a Parks, Experiences, and Products unit. Although their reconstruction of their company is attempting to cut costs, it is at the expense of thousands of jobs. These changes were made shortly after Disney posted its most recent quarterly earnings. Since those earnings were posted, Disney announced that it would be cutting $5.5 billion dollar in costs. $3 billion dollars in costs would be cut from content excluding sports and $2.5 billion would be cut from non-content cuts. The company also said it would be eliminating 7,000 jobs from their workforce which is about 3% of its total 220,000 workers. 

https://www.cnbc.com/2023/02/08/disney-reorganization.html?recirc=taboolainternal

Digital pound likely this decade, Treasury says

 A state backed digital pound is likely to be launched according to the Treasury and the Bank of England. With the declined use of cash and advances in technology, many countries and banks have had the idea of making a central bank digital currency or CBDC. It would be a trustful and safe way for people to be able to pay completely digital through their phones, or other devices. 

The CBDCs would use blockchain technology like a cryptocurrency does, but it would be centralized and the value of each pound would not be change. For example, 10 dollars cash would be 10 dollars in the central bank digital currency.  The CBDCs would be accessible through a digital wallet or smartcard. Another part of the groundwork for a CBDC is that it would be backed against an asset. Prime Minister Rishi Sunak asked the Bank of England to look into backing a currency, in 2021, as chancellor. 

Changing a national currency from paper to digital would have drastic macroeconomic effects. If a CBDC is backed by a fixed asset, then our banks will be restricted and not allowed to print as much money as most economies have in the last 3 years. A CBDC would slow growth and inflation down though because of the inability to increase the money supply. Many digital payment processing companies like Venmo and Zelle would see an increase in activity due to money becoming more digital too. 

There is controversy with CBDC's. Many people are critical of blockchain technology because of the recent collapse of FTX and crypto currencies like Terra Luna. Many fear that this technology also will ruin privacy as "There are likely to be initial restrictions on how much of the currency any individual or business could hold"(BBC) and people speculate that what you spend your CBDC money on is able to be tracked by others. 

Overall, I think that the idea of a CBDC is not the best idea because I fear that the government will be able to manipulate how and what I consume when the CBDCs roll out. I may be against the idea, but I do see the initial framework and infrastructure of CBDCs being implemented soon as many financial leaders and banks have been open about their interest in blockchain technology. These coins being rolled out will require crypto regulation, and now is the perfect time to regulate crypto given the hostility against it by the masses. 

Link: https://www.bbc.com/news/technology-64536593

Devastating Earthquake in Turkey & Syria

    On February 6th, an earthquake with a magnitude of 7.8 began with an epicenter in the Turkish city of Gaziantep.  The earthquake has so far lead to the deaths of over 1,400 people with thousands more injured.  This is the most devastating earthquake since the one in Istanbul in 1999 which took the lives of 18,000 people.  

    Although the title may not appear as "economic news" in the traditional sense, it does not take much to understand the devastating impact that the destruction and leveling of entire cities will have.  Not only will the damage cost the city millions of dollars to restore infrastructure, but the loss of lives is also an economic impact on the area.  The loss of lives decreases the labor force that is so much more crucial in response to the natural disaster.  

    Natural disaster relief is further impacted by the war-torn areas in Syria that have been affected by the earthquake.  The northern portion of Syria hit by the earthquake is currently controlled by three different leaders: the national government, occupied by Turkey, and controlled by rebels.  The separation of leaders in the various territories will having varying responses to the earthquake.  In the context of economic systems, the economic efficiency of each regime varies so dependent upon where you live or your socioeconomic status, depends if you are able to receive assistance or medical attention.  Turkey, as a member of the UN, can receive certain types of disaster relief assistance that the rebel-controlled area of Syria will not have access to.  This lack of current assistance will prevent the cities from being able to recover in the long run.  

https://www.economist.com/international/2023/02/06/massive-earthquakes-in-turkey-and-northern-syria-kill-thousands 

War in Ukraine: who benefits from sanctions, price rise, and materials supply crisis

 When we think about the war in Ukraine we think of the sanctions put on Russia and price rises of many products. However there are some countries and industries that are benefiting by the sanctions put on Russia.  One such industry is steel and ore. Ukraine and Russia are main suppliers of pig iron. Now Turkey, Brazil, and India have started to take on the role of supplying this iron to Europe to meet their quotas. Another industry affected is the copper industry. Russia supplies about 4% of cooper for the world. There is already a deficit in the supply so countries like China, Chile, and Indonesia could benefit from an increased deficit in supply. Other industries that are being affected are aluminium, nickel, oil, gas, and agricultural products, and ammunition. The largest benefactors are the countries that also produce these products. If they are able they can become larger suppliers for countries in need of solutions like the EU. However when there is already a deficit in supply loosing a supplier continues to do harm for the industry. I think what will be interesting to follow will be when the war in Ukraine ends what will be the move for EU countries and the US with relations to Russia. Will they go back to importing from Russia or will they seek out other suppliers to satisfy their needs.

https://gmk.center/en/posts/war-in-ukraine-who-benefits-from-sanctions-price-rise-and-materials-supply-crisis/

The UK recession will be almost as deep as that of Russia, economists predict.

According to Goldman Sachs' 2023 macro outlook, the UK economy is set to undergo a 1.2% contraction in Real GDP over the course of 2023, with the worst economic outlook out of all G-10 nations, being only marginally better than Russia, which is set to undergo a 1.3% contraction in its real GDP. The GS macro outlook also suggests that the UK economy would follow up with a 0.9% expansion in 2024. The consultancy firm KPMG also projected a 1.3% decline in the UK GDP. Goldman's projections for the UK are below the market consensus of a 0.5% contraction in 2033, and a 1.1% expansion in 2024.

This forecast, quite worryingly, puts Britain only marginally ahead of Russia, which continues to wage a war in Ukraine whilst facing punitive sanctions from the western world. the UK seems to be the worst performer amongst all major economies besides Russia, with Germany trailing behind with an expected 0.6% contraction in 2023, followed by a speculated 1.4% expansion in 2024. 

Alongside Goldman Sachs, the OECD (Organization for Economic Cooperation and Development) also suggests that the UK will lag significantly behind other developed nations in the coming years despite being in a similar macroeconomic situation as them, putting London closer in performance to Moscow than the rest of the G-7.

Goldman Sachs' Chief Economist Jan Hatzius further stated that the Eurozone and the UK are already in a recession, with drawn-out increases in household energy bills, causing inflation to soar, causing the real income to fall, leading to negative consequences for consumption and industrial production. Real income is forecasted to further decline in the euro area by 1.5% through Q1 of 2023, and 3% in the UK through Q2 of 2023. The UK Office for Budget Responsibility projects the nation to face the sharpest decline in living standards on record, with a forecasted decrease of 4.3% in real household disposable income. Consumption is also not helped by the fact that the Bank of England increased its interest rates by 50 basis points in December 2022. Households are expected to rein in spending on discretionary goods, and non-essential items, further decreasing consumption. 

These macroeconomic issues coupled with heavily depleted trade post Brexit and the UK sickness crisis are set to have organizations cast a very negative outlook on the UK economy in the coming years. In my opinion, the deteriorating labor market (unemployment rates are set to rise to 5.6% by 2024) coupled with rising inflation is set to have far reaching implications for the global economy as a whole, with UK consumers consuming very little compared to what one might think they would've consumed after the Covid-19 pandemic.

source: https://www.cnbc.com/2023/01/04/the-uk-recession-will-be-almost-as-deep-as-that-of-russia-economists-predict.html

Mortgage Rates Falling

Mortgage rates fell last week for the fourth consecutive week despite the fact that the Federal Reserve hiked interest rates another 25 basis points.  According to an article published on cnn.com, the 30-year fixed rate mortgage averaged 6.09% which was down from 6.13% the week before.  This represents the lowest rate since September of 2022 and is down a full point from the 7.8% peak in November, although rates are still up significantly from a year ago when the average mortgage rate was 3.55%

According to CNN, the most recent drop made a $400,000 mortgage attainable for three million more households as compared to the previous rates.

The Federal Reserve does not directly control mortgage rates but they do set short-term interest rates which impacts the yield on Treasury bonds, and as treasury yields go up, mortgage rates go up too.

The most recent rate hike, which was more modest than the markets expected, signals that inflation is slowing and the economy slows, which is good news for the mortgage industry.

The article quotes Mike Fratantoni, senior vice president of the Mortgage Bankers Association.  “Investors are betting that the economic slowdown and the Fed’s eventual victory over inflation will result in lower rates over time.”

The Mortgage Bankers Association is now forecasting that mortgage rates will continue to drop through 2023, and end the year closer to 5%.

https://www.cnn.com/2023/02/02/homes/mortgage-rates-february-2/index.html 

Unemployment Rate Hits 53 year low

The unemployment rate started the year off strong with an increase in nonfarm payrolls by over 500,000 compared to the estimated 187,000.  This lowered the unemployment rate to 3.4% which is the lowest it's been since May of 1969.  This led to the labor force participation rate of 62.4%.  The largest gain came from the leisure and hospitality sector added 128,000 jobs.  This led to a 0.3% increase in average hourly earnings for the month.  

This increase comes despite the FED's best efforts to lower inflation and slow the economy down.  Chairman Jerome Powell said that the labor markets are still "out of balance" and "extremely tight."  As of the end of the year, there were still 11 million open jobs, which comes out to just a little under 2 for available workers.  

The FED is still holding out hope to perform a "soft landing" and most economists still expect a small recession at some point this year, despite the positive gains in the labor market.

https://www.cnbc.com/2023/02/03/jobs-report-january-2023-.html 

The worst is over for the global chip shortage

     Peter Voser, the chairman of ABB, the Swedish-Swiss tech and engineering giant, believes that the global shortage of semiconductors is being sorted out after years of disruption to supply chains. This shortage has had a ripple effect on the global economy, and was particularly challenging for ABB in 2022. In 2023, Voser expects an improving outlook in China while the rest of the world experiences lower growth. The slowdown in economic activity has helped balance out the shortage, and the US has taken measures to boost the domestic production of chips. Voser also noted that tensions between China and Taiwan are a risk to watch moving forward.             

    Global growth slowdown is also a factor for why the semiconductor industry has turned the corner and supply has increased. However, the shortage has shown the world’s dependency on semiconductors, especially in Taiwan. Hopefully, the newly passed CHIPS act will attract manufacturers to create microprocessors domestically.

https://www.cnbc.com/2023/01/17/worst-is-over-for-global-chip-shortage-abb-chairman-says.html

America needs a new environmentalism

Carbon County Wyoming, of all places, is currently being used as a hotspot for wind farms. There is so much open land in Wyoming, and not a lot of people who need to use the energy with Wyoming's population of 580,000. Philip Anschutz, a billionaire who made his fortune from fossil fuels, wants to turn his Wyoming ranch into a sea of turbines. This is because energy that is made in Wyoming can be transferred to anywhere in the United States. This means that a wind turbine in Wyoming and power a Tesla in Los Angeles. 

President Biden’s most popular legislation is the Inflation Reduction Act (IRA), and provides tax credits to clean energy projects. This incentivizes people like Mr. Anschutz to move from fossil fuel projects to renewable energy projects. The only problem is that getting these projects approved is lengthy, and can take up to five years to fully develop a solar farm, which is causing a major lag in the fight to slow climate change.

What this means is that although the IRA seems to have a lot of potential in fighting climate change, it is happening too slowly to be efficient. This coincides with the idea that some parts of an economic system can actually slow the other down. Although it is more equitable to have a healthy climate, it is not efficient (yet). If we can speed the process of approval for clean energy projects, then it would be more efficient.

https://www.economist.com/united-states/2023/01/29/america-needs-a-new-environmentalism

Fed raises rates a quarter point, expects ‘ongoing’ increases

  The Federal Reserve raised its benchmark interest rate by 0.25 percentage points to a target range of 4.5%-4.75%, the highest since October 2007. This is the eighth increase in a process that began in March 2022, and is intended to bring down inflation which is still running near its highest level since the early 1980s. Markets were looking for signs that the Fed would be ending the rate increases soon, but the statement provided no such signals. Fed Chairman Jerome Powell acknowledged that “the disinflationary process” had started, but noted that it would be “very premature to declare victory or to think we really got this.” The Fed is also reducing its bond portfolio, and markets are betting that the terminal rate is closer to 4.75%. The Fed is likely to make one more quarter-point increase in March, and Powell said it's “possible” that the funds rate could stay lower than 5%, but unlikely to cut rates this year unless inflation comes down more rapidly.

https://www.cnbc.com/2023/02/01/fed-rate-decision-february-2023-quarter-point-hike.html