Daily Comment (September 16, 2020)

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT] | PDF

Our Daily Comment today focuses on the Federal Reserve, highlighting what to expect from its policymaking meeting today, discussing one key result of its ultra-loose policy, and describing the latest developments regarding Judy Shelton’s nomination to the Fed’s board.  We also discuss the latest U.S.-China tensions as well as other key news this morning.

U.S. Monetary Policy:  The Federal Open Market Committee is meeting today, but it is not expected to make any change to its target interest rate or its asset-buying programs.  Rather, investors will be looking for the FOMC to revise its economic forecasts upward and provide additional detail on its new approach to setting monetary policy; this would allow inflation to run above target temporarily in order to spur employment gains and make up for periods of below-target inflation.

  • The Fed’s ultra-low interest rate policy since the onset of the coronavirus pandemic has encouraged a boom in mortgage refinancing, which in turn has spurred a boom in new mortgage-backed security issuance.  According to an analysis by industry research firm Inside Mortgage Finance, the value of single-family mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac totaled almost $322 billion in August, setting a new monthly record.  Still, yields for the securities have held relatively steady in recent months, and even declined slightly, reflecting continued tremendous demand for them.
  • Separately, President Trump’s attempt to place Judy Shelton on the Fed’s board of governors appeared to be in danger after senior Republican Senator John Thune said she lacked enough support in the Senate to win confirmation.  Shelton’s nomination as a governor of the US central bank has been controversial because of her sympathy for the gold standard, her fierce criticism of the Fed as an institution, and questions about her independence from President Trump.

U.S. Regulatory Policy:  According to the Wall Street Journal, the Federal Trade Commission is gearing up to file a possible antitrust lawsuit against Facebook (FB, 272.42) by the end of December, based on its year-long investigation into concerns that the company has been using its powerful market position to stifle competition in the social media market.  The FTC hasn’t yet made a final decision to bring the case, but if it does, it would highlight the increasing regulatory risk faced by high-flying technology companies.

United States-China:  The World Trade Organization ruled that some U.S. tariffs imposed against China in 2018 as retaliation for its theft of U.S. technology are invalid because they apply only to it and not to other countries, in contravention of WTO requirements.  The Office of U.S. Trade Representative Lighthizer criticized the ruling as evidence of the WTO’s inability to adapt to China’s rise and prevent Chinese trade abuses. The ruling likely will have no consequence, because the U.S. has blocked the WTO’s appellate system from functioning.  Nevertheless, the ruling serves as a reminder of the administration’s no-holds-barred pushback against China and the global trading system.  Separately, we now have details on the shotgun marriage between Oracle (ORCL, 60.94) and the Chinese social media app TikTok.  Under the proposal, the Chinese media firm Bytedance would put its entire global TikTok business into a new U.S. headquartered company, with Oracle investing as a minority shareholder.  Other U.S. investors, including Walmart (WMT, 137.36), could also take a minority stake.  Bytedance would remain the majority shareholder, retain control of its powerful algorithms, and continue to collaborate with TikTok, but otherwise would theoretically be a silent stakeholder.  Data on American users of TikTok would be managed and stored strictly in the U.S.  It is unclear whether the arrangement would address President Trump’s concerns about TikTok’s U.S. user data being sent to China.  If not, the president has threatened to ban TikTok from the U.S. market by September 20.

United States-Canada:  In contrast to its criticism of the WTO decision, the administration moved to drop the 10% tariffs it just reimposed last month against Canadian aluminum.  Those tariffs were roundly criticized by U.S. businesses and Canadian officials, but their reversal appeared to be prompted by Canada’s unveiling of counter-tariffs it planned to impose on U.S. goods as early as today.

European Union-Russia:  In her annual State of the Union speech today, European Commission President Ursula von der Leyen warned against closer ties with Russia and said she would put forward proposals for a U.S.-style Magnitsky Act to sanctions people involved in human rights abuses worldwide.

Russia:  Opposition leader Alexei Navalny, after regaining consciousness in the German hospital where he has been undergoing treatment since being poisoned in Siberia last month, promised he would soon return to Russia to continue his fight against the Putin government.  His return will likely make Navalny a continuing thorn in President Putin’s side.

Japan:  As widely expected, the Diet approved Yoshihide Suga, the newly elected chief of the Liberal Democratic Party, as the country’s new prime minister.  To emphasize his commitment to political stability and continuity with former Prime Minister Shinzo Abe’s policies, Suga immediately appointed a new cabinet that included several key ministers from the Abe administration.  For example, Finance Minister Taro Aso, Economy Minister Yasutoshi Nishimura, and Foreign Minister Toshimitsu Motegi will all keep their jobs, while the defense minister’s post will go to Abe’s younger brother, Nobuo Kishi.  We currently plan to provide a biography and an analysis of Suga in our Weekly Geopolitical Report next Monday.

COVID-19:  Official data show confirmed cases have risen to 29,611,845 worldwide, with 935,929 deaths and 20,105,101 recoveries.  In the United States, confirmed cases rose to 6,606,859, with 195,961 deaths and 2,495,127 recoveries.  Here is the interactive chart from the Financial Times that lets you compare cases and deaths among countries, scaled by population.


  • Confirmed U.S. infections jumped by more than 52,000 yesterday, but the seven-day moving average of newly confirmed infections remained well below 40,000, and the seven-day moving average of deaths remained at approximately 750.
  • In Ireland, Prime Minister Micheál Martin, his entire cabinet, and all of parliament were thrown into chaos for several hours on Tuesday after the health minister fell ill with symptoms suggesting he might have COVID-19.  A test on the health minister later came out negative; nevertheless, the ordeal posed a serious disruption on the very day that Martin set out his master plan to tackle the pandemic.

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