Weekly US politics news and updates thread - week of April 18

A whiff of moderation as Fed hurtles to 50 point hike

First to the Fed’s Williams who spoke on Thursday and was the catalyst for the move higher in yields. The main headline was that he thinks the Fed needs to move “expeditiously towards more-normal levels of the federal funds rate.” Adding that he sees neutral being somewhere in the range of 2% to 2.5%. But what likely got the markets attention was his comments around the limited ability of the Fed to tolerate inflation above 2% . There had been some thought that given the Fed’s dual mandate that if inflation persisted high and growth weakened, the Fed could ease off the brake. Not so according to Williams who quashed any thoughts of the Fed willing to tolerate a period above 2% inflation: “we have a 2% longer-run goal” and “we are going to get inflation back to 2%”.

Williams also noted “we will need to get real interest rates….back to more normal levels…by next year…and we may need to go a little above that depending where inflation is”. One proxy for real interest rates used by many for asset valuations is the US 5yr and 10yr TIP yields and it is worth noting the 10yr TIP is getting closer to positive territory at -0.09% and that the 10yr TIP yield averaged positive around 0.50-1.00% (see Bloomberg: Fed’s Williams on Inflation, Policy, Balance Sheet, worth a listen). Meanwhile as your scribe types the Fed’s Bullard is hitting the airwaves, repeating his hawkish commentary that the Fed should be open to a 75bp move, though “more than 50 basis points is not my base case at this point”. Bullard also repeated he “want[s] to get above neutral as early as the third quarter and try to put further downward pressure on inflation at that point” and hiking to a rate of 3.5% would be appropriate given where inflation is.

Currently markets are expecting a 50 basis hike on may the fourth, and another 50 basis hike the next meeting thereafter.

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

The solution to any rate hike inspired recession is... a well diversified portfolio.

https://saf.wellsfargoadvisors.com/emx/dctm/Research/wfii/wfii_reports/Investment_Strategy/globalinvestmentstrategy041122.pdf

DeSantis’s Rush to Battle Disney Puts $1 Billion of Muni Debt in Question (Bloomberg)

Under current Florida statutes, the debts and assets of a special district that is dissolved are passed to the municipal government that takes over. Some Democratic Senators wondered if the move could ultimately transfer debt incurred by Disney to the small cities of Bay Lake and Lake Buena Vista, in addition to the governments of Orange and Osceola counties. Bay Lake had a population of just 29, according to the 2020 census, while Lake Buena Vista was home to 24.

Republican State Senator Jennifer Bradley, who sponsored the legislation in the Florida Senate, said the current bill would not cancel any debt. The bill calls for the districts to be dissolved as of June 1, 2023, barring any further legislative action.

[...]

Analysts at S&P Global Ratings said they’re monitoring the situation and waiting for final legislation to make an assessment.

“The State of Florida has made many legal promises to bondholders of Reedy Creek,” said Eric Kazatsky, Bloomberg Intelligence senior strategist. “Namely they have promised not to alter the rights of the District or impair the rights of bondholders, and more importantly impair the exemption of the assets and properties of the District. Trying to walk those back will be a huge legal hurdle.”