Finance Committee Agenda and Packet 2022 05 09

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Economic Update ■ The Russian invasion into Ukraine and resulting Western sanctions on Russia have fueled volatility in financial markets. The latest escalation has exacerbated inflationary pressures, particularly in energy and commodities, and has caused tightening conditions in financial markets. While consumer spending and economic growth remain strong, we believe an extended conflict in Eastern Europe along with elevated energy prices increases the risk of an economic slowdown later this year. While we expect the Fed to tighten monetary policy, the FOMC has very little margin for error as it attempts to combat inflation without pushing the economy into a recession. Overthe near -term, we expect financial market volatility to remain elevated and conditions to remain tighter with heightened geopolitical risk, supply chain bottlenecks and persistent inflation, and the Fed's pivot to less accommodative monetary policy. The Federal Open Market Committee (FOMC) raised the federal funds rate by 0.25% at their March 16th meeting to a target range of 0.25% to 0.50%. The Federal Reserve also ended their bond -buying program as expected in March, which included the purchase of treasury and agency mortgage -backed securities. Fed Chair Powell suggested that balance sheet runoff could begin as early as their next meeting in May, soonerthan previously anticipated, and that the pace of the unwind will likely be fasterthan in the previous quantitative tightening cycle. The dot plot favors six additional rate hikes in 2022, which implies a 25 basis point rate hike at each remaining meeting this year, but the Fed hasn't ruled out incorporating one or more 50 basis point hikes to address inflation. The FOMC's Summary of Economic Projections forecasts higher Personal Consumption Expenditure (PCE) inflation this year at 4.3% and a lower growth rate of 2.8% real GDP. We are anticipating additional rates hikes by the Fed this year, but we do not believe that monetary policy is on a pre-set course and expect the Fed's policy adjustments will depend on developments in the economy. In April, yields continued to rise and the curve steepened. The 2-year Treasury yield increased 38 basis points to 2.72%, the 5-year Treasury yield increased 50 basis points to 2.96%, and the 10-year Treasury yield increased 60 basis points to 2.94%. The spread between the 2-year and 10-year Treasury yield increased to 22 basis points at April month -end versus zero basis points at March month -end, but down from 147 basis points one year ago. While the flat yield curve bears watching over the longer run, the spread between 3-month and 10-year treasuries is still steep at about 210 basis points, which indicates likely economic growth in the coming year. 3 QtJ 11