The President signed into law the Inflation Reduction Act on August 16. This mono-partisan 730-page bill addressed several Democratic priorities and passed the Senate and House on strictly party-line votes.
With this budget reconciliation bill out of the way, Congress departed for their traditional August recess. When they return to Washington in mid-September, they plan only three weeks of voting before leaving to campaign on September 30. On November 14 they will convene a month-long “lame duck” session to complete any unfinished business such as the federal budget for the current year.
One bill that is likely to pass before year-end is a combination of the House SECURE Act 2.0 and the Senate Enhancing American Retirement Now (EARN) Act. These very similar bills passed their respective chambers with overwhelming majorities, and a conference committee will be appointed to iron out their differences. One bill will then be submitted to both chambers for an up or down vote. If this is not completed by year-end, Congress will have to start the process over again in January.
Meanwhile, the Internal Revenue Service (IRS) is still finalizing regulations from the 2019 SECURE Act. Earlier this year they proposed rules that would require IRA beneficiaries to not only empty an inherited retirement account within 10 years as required by the SECURE Act, but also require beneficiaries to take annual Required Minimum Distributions (RMD) every year until the inherited retirement account is empty.
The new rules are not final yet, and we are anticipating further guidance or a final rule from the IRS before year-end. If you inherited a retirement account in 2020 or 2021, it is possible you may need to take an RMD before the end of 2022.
Our current national debt stands at $30,695,428,647,128.38 as of August 17, 2022. (Source: U.S. Treasury)
Federal Reserve update
The Federal Reserve continued its efforts to reign in high inflation at its July 27th meeting, raising its target overnight interest rate by .75%. They will meet again on September 21 when bond traders expect either a .50% or .75% increase (depending on which day you ask them). (Source: CME FedWatch Tool)
Additionally, on September 1 the Federal Reserve plans to double the monthly rate by which they are shrinking their accumulated portfolio of Treasury bonds and mortgage bonds. They intend to allow $60 billion per month of Treasury bonds and $35 billion per month of mortgage bonds to mature without reinvesting the money in new bonds.
How high will the Fed need to hike its short-term rates before inflation crumbles? It is impossible to say, but their efforts thus far are starting to show some initial results. The hot housing market is cooling as mortgage interest rates have roughly doubled since last year. The commodity markets (particularly oil) have declined as traders start pricing in the likelihood of slower economic growth or even a mild recession.
Bond traders currently believe that the Federal Reserve’s short-term interest rate target will peak around 3.50% or 3.75% later this year or early next year. For this prediction to come true, the Fed would need to raise its target rate a total of 1.25% during its next three meetings.
If economic data begins to show substantial progress in reinforcing the Fed’s inflation-fighting credibility, they may not raise rates as high as the market is currently expecting to minimize the risk of a recession. The opposite is also true.
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