Wednesday in Washington

This week President Obama will deliver the annual State of the Union address, the US Treasury will issue floating rate notes, and the Federal Reserve’s Federal Open Market Committee (FOMC) will release its interest rate decision. On Tuesday night, President Obama will outline his vision for the nation in his annual State of the Union address. On Wednesday the markets will react. The President will likely seek to contrast Democrats and Republicans going into midterm elections this fall and try to make up for the botched Affordable Care Act website roll-out last fall. He may repeat last year’s unscripted goal of raising the national minimum wage to $9 per hour, which could have inflationary ramifications. Or he could surprise with new fiscal objectives, which could affect unemployment and/or GDP expectations. On the same day, the US Treasury will auction its first new product in seventeen years: floating-rate notes. The notes will pay quarterly (versus the typical semi-annually) and come in response to consultations with primary dealers, institutions that buy directly from the government, seeking to diversify interest rate exposure and hedge against higher rates on economic improvement and withdrawal of Federal Reserve bond buying. This week’s most significant event for markets, also on Wednesday, is the conclusion of the FOMC’s two-day meeting. Despite a weak December jobs report and recent risk market wobbles, we expect the FOMC to continue its "taper" of bond-buying by another $10 billion and for the policy rate target to remain unchanged. SNWAM portfolios will benefit from our expectation that the FOMC will stay the course and interest rates will rise as the economy expands.