All Eyes on Washington

Breaking News, WSJ reporting that Jerome Powell is going to be nominated as the new Chairman of the Federal Reserve, replacing Janet Yellen in 2018 (subject to Senate confirmation). This is a “Goldilocks” pick that allows the administration to “change direction” (Powell is less supportive of post crisis regulations such as Dodd Frank than Yellen, especially for small banks) and “stay the course” (Powell is seen as “dovish” on rate increases and balance sheet reduction, likely to continue on the path set forth by Yellen). That path is assumed to be gradual quarter point increases from today’s 1.25% short term rate up to a “neutral rate” of 2.75-3.00% in 2020, ie. about 10 more rate increases or about 3 per year. Also, Congress is expected to (finally) release the details of the tax reform plan. Early buzz tonight indicates that some of the expected features are being scaled back, including estate tax repeal, lowering of the top bracket rate and designating the corporate tax rate cut as temporary. The real estate sector will be watching closely as the mortgage deduction, property tax deduction and 1031 rules have been discussed as “on the table”. Today’s Fed meeting and announcement left rates unchanged with a unanimous vote. Language in the announcement described the economic growth as “solid” (up from “moderately growing”), but inflation was referred to as “soft” (note that the Fed’s preferred inflation gauge, PCE, came in at 1.6% last week even with a spike in gasoline prices). Regardless, they are setting the stage for a rate increase next month. Data watch: look for wage inflation in Friday’s unemployment report. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners