STATE GOVERNMENT RELATIONS
Pensions: State Loses $200M in Russia Divestment
Indiana's pension system lost $200 million in two months after Russia invaded Ukraine in early 2022, according to Scott Davis, chief investment officer of the Indiana Public Retirement System – but that's loose change for a system with $45.8 billion in assets invested worldwide. The bulk of INPRS assets are invested in the United States, with the next-largest investments in the United Kingdom, Germany, China and Japan. It also has money in laissez-faire Hong Kong – subject of recent crackdowns by ruling China – and tax haven Cayman Islands. Davis said the system diversifies across dozens of countries to minimize risk. Less than 4% of the portfolio is invested in any one foreign country; about 70% of assets are invested in the U.S.
Huston Wants $500M for READI Program
Gov. Eric Holcomb's major economic development initiative – the READI grant program – looks set for another significant influx of funding. The governor created the READI grants in 2021 to help generate public and private investment in local economic development. Its first round of funding – $500 million – came from the Biden administration's stimulus package, the American Rescue Plan. House Speaker Todd Huston, R-Fishers, wants another $500 million in the upcoming state budget. "Using READI funding and other tools, we can work with our local partners to ensure more communities have housing options to meet the needs of today and the future," Huston said.
Affordable Housing, Worker Shortage Among Expected Topics of 2023 Session
A central theme among state lawmakers' priorities for the 2023 legislative session is finding solutions for Indiana's shortage of qualified workers. A kink in the talent pipeline is a severe problem for a state that prides itself on being pro-business. In discussing priorities for the upcoming session, Statehouse leaders said they'll be looking to enhance several pieces of that puzzle. In addition to reimagining high school to better align with workforce needs, Huston said that affordable housing is one of the biggest challenges of building and maintaining the workforce.
FEDERAL GOVERNMENT RELATIONS
Powell Signals Fed Will Slow Pace of Rate Increases
Federal Reserve Chairman Jerome Powell said while inflation remains persistently high, the Federal Open Market Committee may slow the pace of increases in the federal funds rates starting as early as its December meeting. The FOMC has raised the rate six times this year, including four rate increases of 75 basis points each. Powell said it will take time for the effects of those policy decisions to play out. "Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down," he said.
The FOMC will meet Dec. 13-14. Powell and other FOMC members have stressed that the committee will need to maintain a restrictive policy stance until inflation shows signs of returning to the Fed's 2% target. Powell said during his speech that while forecasts from the private sector and FOMC participants show a significant decline in inflation over the coming year, they have been predicting a decline for more than a year "while inflation has moved stubbornly sideways."
"Growth in economic activity has slowed to well below its longer-run trend, and this needs to be sustained," Powell said. "Bottlenecks in goods production are easing, and goods price inflation appears to be easing as well, and this, too, must continue. Housing services inflation will probably keep rising well into next year, but if inflation on new leases continues to fall, we will likely see housing services inflation begin to fall later next year. Finally, the labor market, which is especially important for inflation in core services ex housing, shows only tentative signs of rebalancing, and wage growth remains well above levels that would be consistent with 2% inflation over time. Despite some promising developments, we have a long way to go in restoring price stability."
In a Q&A session after his remarks, Powell reiterated his view that it is still possible to have a "soft or a soft-ish landing" characterized by increasing unemployment, but not spiking far enough to cause a severe recession. He acknowledged, however, that the path to such a landing has narrowed and that "to the extent, we need to get rates higher or keep them higher longer, that's going to narrow the path to a soft landing."
Fed Officials See Inflation Fight Lasting Through 2024
Two members of the Federal Open Market Committee said Monday that the committee is likely to raise the federal funds rate again in the future and perhaps maintain a restrictive policy stance into 2024. In an interview with Bloomberg Marketplace, St. Louis Fed President James Bullard said the rate has only recently moved into restrictive territory, "and we're going to have to move farther to keep inflation under control."
"I think we are going to have to stay there in 2023 and into 2024 given the historical trend of core PCE inflation or Dallas trimmed mean inflation," Bullard said. "They will come down…but they probably won't come down as fast as markets would like."
New York Fed President John Williams said there "is still more work to do" during a speech to the Economic Club of New York. However, he added that the Fed's tighter monetary policy has an effect. "Broad measures of financial conditions, including borrowing and mortgage rates and equity prices, have become significantly less supportive of spending. This has led to a decline in activity in the housing market and signs of general slowing in consumer expenditures and business investment spending."
Williams said he expects real GDP to increase only modestly this year and in 2023. He anticipates that the unemployment rate will climb from its current level of 3.7% to between 4.5% and 5% by the end of next year. He also expects inflation to slow from its current rate to between 5% and 5.5% at the end of this year and between 3% to 3.5% next year. "Further tightening of monetary policy should help restore the balance between demand and supply and bring inflation back to 2% over the next few years," he said.
FDIC: Bank Net Income, Unrealized Losses Increased in Q3
Banks and savings associations insured by the Federal Deposit Insurance Corp. earned $71.7 billion in the third quarter of 2022, a 3.2% increase from the same period last year, according to the FDIC’s most recent Quarterly Banking Profile released Thursday. The report painted a healthy portrait of the banking industry, but also showed that unrealized losses grew by 47% quarter over quarter to $689.9 billion. FDIC Acting Chairman Martin Gruenberg said that due to the industry’s current liquidity strength, there is no necessity for institutions to sell assets and take unrealized losses. “The issue will be how things play out for the economy and the financial system going forward,” he said.
The net interest margin increased 35 basis points from a quarter ago and 58 basis points from a year ago to 3.14%, with both being the largest reported increases in the history of the QBP. Total loan and lease balances increased by a record 9.9% year over year, or $1.1 trillion. The increase was driven by growth in commercial and industrial loans (up 11.6%), one-to-four family residential mortgages (up 9.6%) and consumer loans (up 11.4 %). Net income for community banks grew $1 billion (13.5%) from the previous quarter.
Total net charge-offs increased six basis points from a year ago to 0.26%, driven by higher credit card and auto loan net charge-offs. Twenty-six institutions merged, three new banks opened and no banks failed in Q3. The number of banks on the FDIC’s problem bank list increased by two to 42.
FHFA Announces New Loan Limits for 2023
The Federal Housing Finance Agency indicated Tuesday it will raise the maximum conforming loan limits for mortgages Fannie Mae and Freddie Mac purchase in 2023 from $647,200 to $726,200. This is the seventh time FHFA has increased the baseline loan limit since 2006.
In high-cost areas, such as Los Angeles, New York, San Francisco and Washington, D.C., the maximum loan limit will be $1,089,300, 150% of the nationwide conforming loan limit. Limits will rise in all but two counties in the country.
Senate Panel Chair Asks Yellen to Aid Crypto Crackdown
Senate Banking Committee Chair Sherrod Brown, D-Ohio, has called for Treasury Secretary Janet Yellen to work with entities such as the Securities and Exchange Commission and the Federal Reserve Board to produce legislation that would address cryptocurrency risks in light of the collapse of FTX, a cryptocurrency exchange.