Despite Ukraine, Fed Pushes Ahead on Rate Hike

By Michael Rainey

Our deepest sympathies are with the people of
Ukraine following the brutal invasion of their country by
Russian forces Thursday. President Joe Biden announced “additional
strong sanctions” on the aggressor country this afternoon, taking
aim at major banks, state-owned enterprises and national elites.
“Putin is the aggressor,” Biden said. “Putin chose this war. And
now he and his country will bear the consequences.”

Here's what else is going on.

Fed Officials Say Interest Rate Hike Still on
Track

Leaders at the Federal Reserve said Thursday that they expect to
start raising interest rates next month as planned, despite the
increased economic risk and uncertainty generated by Russia’s
invasion of Ukraine.

“Barring an unexpected turn in the economy, I believe it will be
appropriate to move the funds rate up in March and follow with
further increases in the coming months,” Cleveland Fed President
Loretta Mester
said. The course of events in Ukraine will likely
influence the pace at which rates are increased, Mester added.

Atlanta Fed President Raphael Bostic said that the central bank
has its own estimates of how the Russian invasion will affect the
economy. “If the numbers come in close to that I think that can we
continue with our liftoff plan,” he said. “We’ll just have to see
where things go. I know we have seen over the past several weeks
that oil prices have increased dramatically, as have natural gas.
That could have ripples.”

In a note to clients, Goldman Sachs economists Joseph Briggs and
David Mericle said the level of inflation in the U.S. makes it more
likely that the Fed will plow ahead. “The current situation is
different from past episodes, when geopolitical events led the Fed
to delay tightening or ease, because inflation risk has created a
stronger and more urgent reason to tighten today than existed in
past episodes,” they wrote.

Quote of the Day

“Treasuries provide protection in an environment like this. I
think recession risks are rising, and there has never been a
recession in modern history where long-term Treasuries didn’t make
you money.”

— Economist David Rosenberg, talking to
The New York Times about the role of Treasury
bonds during difficult economic times. The interest rate on the
10-year Treasury fell below 2% Thursday, to 1.96%, as investors
sought safe havens amid growing international tensions.

Number of People on Unemployment Hits 52-Year
Low

New jobless claims fell by 17,000 to 232,000 last week, the
Labor Department announced on Thursday. The four-week average also
fell, down 7,250 to 236,250, indicating that businesses continue to
recover from the omicron wave of the coronavirus during the
holidays.

The number of people continuing to collect jobless aid also
moved lower, decreasing by about 112,000 in the week ending
February 5. In all, about 1,476,000 Americans were collecting
unemployment benefits – the lowest number since 1970.

“Demand for labor is strong and there are no reasons to believe
that this will change any time soon, barring another wave of a new
COVID variant,” analyst Thomas Simons and Aneta Markowska of
Jefferies Financial Group
said in a note. “We expect that both initial and
continuing claims will continue to grind lower in the weeks
ahead.”

White House to Issue New ‘Buy American’
Guidelines

The Biden administration announced Thursday that it will be
taking steps to strengthen the supply chain in the U.S., including
new rules governing the federal government’s purchase of
American-made goods.

“The White House Office of Management and Budget will soon issue
a new Buy American rule that will create a new category of critical
products that will be eligible for enhanced price preferences,” the
White House said in a
statement. “By allowing the Federal government to
pay an additional premium for critical domestic-made products and
components essential to the Administration’s supply chain
resiliency strategy, the new rule will create a steady source of
demand that will help catalyze domestic production and bolster thin
supply chains.”

The announcement comes a year after President Joe Biden signed
an executive order directing the federal government to look for
ways to improve the U.S. supply chain. The White House released a

report Thursday laying out the conclusions of the
analysis, as well detailed reports on the issue from seven cabinet
agencies, including Defense, Energy and Commerce.

New State and Local Tax Deduction Plan Takes
Shape

Despite resistance from critics across the political spectrum, a
handful of blue-state lawmakers are continuing to push for an
increase in the state and local tax (SALT) deduction. An earlier
effort to do so was included in the Build Back Better bill that
Democrats have largely abandoned, but now Democratic Reps. Tom
Malinowski of New Jersey and Katie Porter of California have
offered a revised version that would cost less while still
providing significant relief to middle- and upper-middle-class
families living in high-tax jurisdictions.

The proposed plan would eliminate the current $10,000 cap on the
SALT deduction for households earning less than $400,000 a year.
Households earning above amount would face a $60,000 cap on their
deduction, with the cap shrinking as incomes rise and phased out
entirely above $1 million. Taxpayers claiming the deduction would
also have to declare that they are not billionaires.

The plan would raise about $150 billion over 10 years, the
lawmakers say – not as much as the current law, but enough to cover
the cost of adding hearing and vision benefits to Medicare, which
comes with an estimated $120 billion price tag over a decade.

“When I first ran for congress, I promised to right the wrongs
of the 2017 GOP tax bill by restoring the SALT deduction for my
middle-class constituents,” Malinowski said in a statement. “This
is a win-win approach that we hope will produce compromise on the
SALT issue.”

Whatever its appeal, though, the plan is not expected to
advance. “The SALT plan is unlikely to be taken up in Congress
anytime soon,” Bloomberg’s Laura Davison
wrote.

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