Monthly Archives: October 2020

Leaving New York: High earners in finance and tech explain why they left the ‘world’s greatest city’

Brenan Hefner, co-founder and chief operating officer of Analyst Hub, and his family outside of their former home in Pelham, NY.
Source: Brian Hefner

Like many before him, Brenan Hefner arrived in New York 20 years ago in search of a career on Wall Street.

His journey will sound familiar to those drawn to the nation’s financial capital. Hefner got a job at an asset management firm in Manhattan, found love and career success, and eventually moved to Pelham, an upscale town in Westchester, to start a family.

He would still be there if it wasn’t for the coronavirus pandemic. When Hefner, co-founder of a research platform called Analyst Hub, sold his house this summer to a couple from London, he wondered if it made sense to look beyond the surrounding neighborhoods for a new home. He ended up moving his family to Dallas last month.

Hefner is one of thousands of high earners who’ve left New York this year, an exodus that is deepening concerns over a projected $9 billion budget shortfall. While the city is no longer the national virus hotspot it was earlier this year, those leaving cite anxiety over the region’s economy and quality of life and a conviction that higher taxes are coming. Last month, business leaders publicly upbraided Mayor Bill De Blasio for “deteriorating conditions in commercial districts and neighborhoods across the five boroughs.”

By forcing the mass adoption of remote work and crimping many of the advantages of urban life, the pandemic has turbocharged migration from high cost, high-density places to lower-cost states including Texas, Florida and Nevada. Nearly half of New Yorkers earning more than $100,000 a year said they considered leaving the city recently, with cost of living being the top factor, according to a Manhattan Institute survey.

“The cost of living down here is significantly less,” Hefner said by phone from his new home. “There’s no state income tax. I’m not riding mass transit during the middle of a global pandemic to get to a subway to live in a WeWork or something.”

For Brenan, the pandemic showed that for those in financial services, the gravitational pull of New York still exists, but is far weaker. He says he is about as effective operating his business over Slack and Zoom, and plans on flying to New York monthly for client meetings. His company, founded in 2018, helps star Wall Street analysts leave big banks to form independent research shops.

“I’m just not sure it’s a requirement to be in the city anymore,” Hefner said. “That doesn’t mean that I don’t love the city, I do. It’s an amazing place, but as far as a family of five, I’m not sure if it’s the right place for us at this time.”

‘Everybody’s leaving’

Even within his 19-person start-up, Brenan has company. Caroline Goodson, his director of corporate access and sales, left Manhattan after a homeless encampment popped up outside her apartment building. She also moved to Dallas.

His co-founder Michael Kronenberg, who owns a downtown Manhattan apartment, has spent most of the pandemic outside of New York, renting a succession of houses in places including Scottsdale, Arizona; Vail, Colorado and Sullivan’s Island, South Carolina. For senior finance professionals not chained to a trading floor, moving to lower-tax states has never been more appealing, he said.

“Everybody I know is leaving,” Kronenberg said. “It’s not just New Yorkers. My partners, long-time clients and investors of mine that live in Connecticut or New Jersey, they are used to commuting in to the city. They’re never going to commute in five days a week ever again.”

The coronavirus pandemic has caused the worst global economic crisis in living memory and taken 230,000 American lives so far, with New York City claiming one-tenth that grim figure. Downtown and midtown business districts are still a shadow of their former selves, depriving local businesses and the city of much needed revenue. A record daily case count in the U.S. and surges in Europe have New Yorkers bracing for a tough winter.

But since moving trucks began clogging city streets this summer, New Yorkers have been incensed by the idea that the place De Blasio refers to as the “greatest city in the world” is on the cusp of a multi-year decline. An ex-hedge fund manager’s LinkedIn post that declared “NYC is Dead Forever” prompted a withering response from Jerry Seinfeld.

Many of those who remain say the city is more livable than before, with streets closed off to car traffic and restaurants taking up more outdoor space. Of course, the city has bounced back from every calamity in its history, from the 1918 Spanish flu to the suburban flight of the 1970s, the terror attacks of 9/11 and the 2008 financial crisis.

Falling rents

But it’s hard to deny the signs of pain ahead. Data from the U.S. Postal Service, national moving companies and tech start-ups tracking smartphones all show an elevated outflow from New York City this year. More than 246,000 New Yorkers filed a change-of-address request to zip codes outside the city since March, almost double the year-earlier period, for instance.

That’s reduced demand for Manhattan apartments, where median monthly rents fell 7.8% to $2,990 in the third quarter, part of a city-wide decline not seen since 2010, according to StreetEasy.

To be sure, the New York area’s suburbs have been the primary beneficiary of the exodus: Home sales in Westchester jumped 112% in July, according to appraiser Miller Samuel Inc. Sales in Greenwich, Connecticut just had the strongest quarter in more than a decade.

For those in finance, the simple math of lower tax regimes is hard to ignore. New York state levies 8.8% on wages for high earners, and New York City takes another 3.9%, or nearly 13% combined. Meanwhile, states including Florida, Texas and Nevada don’t tax wages. The more people make, the greater the incentive there is to leave, and the difference could easily mean hundreds of thousands more dollars in after-tax pay.

That’s a trade that some Wall Street titans have already made. Hedge fund billionaire Paul Singer is moving the headquarters of Elliott Management to Florida from midtown Manhattan, Bloomberg reported this month. His move follows that of another billionaire, famed corporate raider Carl Icahn, who made the switch last year to avoid New York taxes.

Busiest in 40 years

“My concern isn’t that they’re leaving, it’s that they’re taking their businesses with them,” said Mark Klein, a New York-based tax attorney and chairman of Hodgson Russ. The flight of business owners is worrying for those remaining in the city, he said.

Still, it has kept him busy. Klein says he has ten times more clients now than pre-pandemic, helping advise people who make more than $800,000 a year move to low-tax states, often bringing their businesses along. Besides hedge funds, Klein said that a spectrum of professional services operators are leaving, including public relations and accounting firms.

“I’ve never been as inundated with people leaving New York and Connecticut, any of these high-tax states, in my 40 years of doing this,” he said. “Once Covid hit, with the recognition that people can work from any location, the floodgates opened.”

The stakes are higher in an election year, with many in finance convinced that higher taxes are coming if Joe Biden wins and Democrats take the Senate. Within Goldman Sachs, multiple traders have told me they are voting for Biden “against their own financial interests” because of his stated plan to raise taxes on those earning more than $400,000 – an easy threshold to exceed on Wall Street.

And to a person, high-earners I spoke with said that the $10,000 cap on state and local tax deductions from President Trump’s 2018 overhaul hurt them personally and believe that local governments are going to seek more money from them in coming years.

Leavers aren’t limited to hedge fund traders and portfolio managers; New York is also home to a growing ecosystem of fintech firms.

Paraag Sarva, CEO of fintech firm Rhino.
Source: Paraag Sarva

When fintech CEO Paraag Sarva bought a weekend home in Bucks County, Pennsylvania last year, he figured he’d probably rent it out most of the time. But months into the pandemic, after it became clear that full-time, in-person schooling in New York was unlikely for his small children, he made it his permanent residence.

His new neighborhood, studded with horse farms and multi-acre estates, is vastly different from his old home by the expressway in Brooklyn. Two other families from New York have moved in recently, he said, and they have brought their businesses.

His start-up, Rhino, which replaces renters’ security deposits with a small recurring fee, is still based in Manhattan. But Sarva rarely returns; he has managed the firm’s explosive growth from afar. During the summer, the company doubled its employee count to 90 and raised $14 million in additional capital.

While schooling and quality of life were the main drivers of his move, the lifelong New Yorker wasn’t going to “leave money on the table.” His taxes are 10% lower in Pennsylvania, he figures.

“Once we made the decision, we did consult our tax and legal advisors on what exactly that would mean,” Sarva said. “I am officially a Pennsylvania resident. I voted here, registered my car here, have a Pennsylvania driver’s license. I’ve moved out of my former home and have no intention of returning.”

‘Less boring’

In some finance circles, even people who may not have permanently uprooted their families like Hefner or Sarva are pushing for a tax break. They are typically city dwellers who moved full time to their second homes once the pandemic struck.

“There are a bunch of people I know trying to get out of the NYC tax, they’re living in the Hamptons, Westchester, Connecticut or New Jersey,” said a managing director at a major global investment bank. Another colleague who worked mostly in New York moved her residence to Delaware, he said. He declined to be identified speaking frankly about taxes.

The executive owns condos in Manhattan and houses in Sag Harbor, but has spent most of the pandemic in New Jersey. After a three-hour meeting with his tax consultant, he plans on filing taxes as a Jersey resident to avoid New York’s 3.9% city tax. He and his friends are risking an audit, which can happen three years after he files his 2020 taxes.

In the meantime, he’s worried that his expensive Manhattan properties will lose as much as 40% in value in the coming years.

“Nobody’s gonna feel sorry for me,” he said. “The good news is, maybe the city will get less boring.”

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Author: Hugh Son

Here’s how a Biden or Trump presidency would affect your personal finances

Joe Biden, 2020 Democratic presidential nominee, right, and President Donald Trump during the presidential debate at Belmont University in Nashville, Tennessee, on Oct. 22, 2020.
Kevin Dietsch/UPI/Bloomberg via Getty Images

President Donald Trump and Joe Biden, his Democratic opponent in next week’s election, have broadly diverging views on issues that would impact the personal finances of everyday Americans.  

It’s no guarantee the candidates’ ideas and proposals will eventually become law. Much hinges on the outcome of congressional races, for example.

But here are things to consider as voters head to the polls on Tuesday, on issues like taxes, Social Security, student loans and Medicare.

Taxes

The Trump campaign said it would “cut taxes to boost take-home pay and keep jobs in America.” It offers scarce details on how this would be accomplished.

Experts believe the president would try to build on the Tax Cuts and Jobs Act, viewed as his signature legislative achievement during his first term.

The law, enacted in 2017, overhauled the tax code for individuals and businesses. It roughly doubled the standard deduction and limited some itemized deductions (like one for state and local taxes), among other things.

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On average, the law cut taxes for Americans across all income groups, according to a report published by the Joint Committee on Taxation last year.

The richest Americans pocketed most of the benefit. About 76% of the estimated $259 billion in taxpayers’ total savings in 2019 went to those making more than $100,000 a year, according to the report.

However, the bill’s tax cuts for individuals are temporary. They are set to expire after 2025 and revert back to prior law, effectively raising taxes.

The Trump administration would likely try to make these cuts permanent, tax experts said.

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Doing so would raise after-tax income for all households, on average, delivering a 1.5% increase, according to the Urban-Brookings Tax Policy Center. The top 20% of Americans (making roughly $167,000) would get about two-thirds of the benefit.

Trump administration officials like economic advisor Larry Kudlow have also floated the idea of a tax cut for the middle class. Trump has also proposed cutting taxes on capital gains (the top tax rate of which is currently 20%).

Biden, who was vice president during the Obama administration, has proposed raising taxes for wealthy Americans. He would seek to reduce taxes for lower earners via mechanisms like a temporary expansion of the child tax credit.

The Biden campaign floated a top income-tax rate of 39.6% (up from 37%) for those earning more than $400,000. He would raise their payroll taxes, too.

The Biden plan would also limit the value of itemized deductions (write-offs for charitable donations and medical costs, for example) for wealthy households making more than $400,000.

Biden would also increase taxes on capital gains to 39.6% for those making more than $1 million a year — almost double the current rate.

“That’s mega, mega significant. A lot of the ultra-high-net-worth people make a great deal of their income through investment income,” said Jeffrey Levine, director of advanced planning at Buckingham Wealth Partners.

The top 20% (those making more than roughly $160,000) would be the only group to see a tax increase in 2022, according to the Tax Policy Center. Their tax liability would grow by 5%, or $14,700, in 2022.

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Meanwhile, Biden would boost the child tax credit to $3,000 for kids 17 and younger, plus a $600 bonus for children under 6. (The credit is currently $2,000 for kids under 17.) Biden would also make it fully refundable, meaning taxpayers would get a refund even if they owe no tax. (Up to $1,400 is currently refundable for each child.)

The bottom 20% of earners would see after-tax income grow by more than 5%, or roughly $750, in 2022.

Some observers believe low and middle-income taxpayers could see negative indirect effects from Biden’s proposal to increase the corporate tax rate, via increased prices for consumer goods or stagnating wages for employees.

Social Security

Biden’s plan calls for boosting Social Security checks for individuals in many ways.

For example, his proposal would raise monthly payments for seniors who’ve been receiving benefits for at least 20 years, to protect against depleted retirement savings.

It would also set a minimum benefit — at least 125% of the poverty level — for those who’ve worked at least 30 years. Monthly survivor benefits for widows and widowers would grow by 20%.

Biden would also seek to improve Social Security’s finances.

Earlier this year, the Social Security Administration projected the trust funds that help pay benefits would run out in 2035. At that time, around 79% of promised benefits would be payable, funded exclusively by payroll taxes.

The unemployment crisis caused by the Covid-19 pandemic has sped up that timeline by a few years, according to some estimates.  

Biden would impose Social Security payroll taxes on high earners to improve the program’s solvency. Currently, workers pay 6.2% from wages, capped at wages up to $137,700 (which is indexed for inflation). Biden would also apply taxes to earnings over $400,000.  

Trump’s campaign agenda says he would “protect Social Security.” He’s tweeted messages of support for Social Security on many occasions and said he would “save” the program.

The president signed an executive measure in August creating a Social Security payroll tax holiday, between Sept. 1 and Dec. 31.

It’s a tax deferral, and workers would have to pay the tax back early next year. Businesses had to opt in. It only applied to workers making less than about $100,000 a year.

But Trump has floated forgiving that deferred tax.

“If I’m victorious on Nov. 3, I plan to forgive these taxes and make permanent cuts to the payroll tax,” Trump said.

A permanent payroll tax cut could deplete the Social Security trust funds by mid-2023, according to Stephen Goss, Social Security’s chief actuary.

Student loans

Biden has proposed forgiving $10,000 in student debt for all borrowers.

He would also forgive federal student debt tied to undergraduate tuition at public colleges and historically Black colleges and universities. That would apply to borrowers earning less than $125,000 a year.

Trump hasn’t mentioned sweeping plans to forgive student loans. He’s called for eliminating public-service loan forgiveness, which allows certain not-for-profit and government employees to have federal student loans canceled after a decade of on-time payments.

Biden would keep that program but make changes, instead forgiving $10,000 a year of undergraduate or graduate student debt for up to five years.

The Trump administration has allowed borrowers to pause monthly student loan payments without interest accrual during the Covid-19 pandemic. The U.S. Department of Education initially offered that moratorium in March, and the president signed an executive measure over the summer extending that pause through 2020.

It’s unclear if that moratorium would be extended next year if Trump (or Biden) wins the election.

Medicare

Trump has taken some steps to ease costs for Medicare beneficiaries and has proposed some changes to the senior health program.

For example, the president has moved to reduce drug costs, by lifting “gag orders” on pharmacists that prohibited them from telling patients there was a cheaper option for their prescriptions, for example. He capped monthly insulin costs, effective next year, for some Medicare beneficiaries.

Trump also wants to send $200 payment cards to some individuals on Medicare to help pay for drugs, he said in a speech last month.

The Trump administration is supporting a lawsuit seeking to overturn the Affordable Care Act. That law, known as Obamacare, made some changes to Medicare. For example, it added certain free preventive benefits to Medicare and eliminated, over several years, a spike in out-of-pocket spending on prescription drugs that some beneficiaries faced.

Biden has proposed some changes to Medicare, too.

His plan would allow individuals to enroll in Medicare starting at age 60 instead of 65. The program would cover dental, vision and hearing, all of which are currently excluded.

Biden also wants to reduce the cost of prescription drugs for Medicare beneficiaries by, for example, allowing the government to negotiate those prices — which is currently prohibited by law. He would prohibit most drug prices from rising faster than inflation.

His campaign also supports the Affordable Care Act.

— CNBC reporters Lorie Konish, Darla Mercado, Annie Nova and Sarah O’Brien contributed to this story.

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Author: Greg Iacurci

Activist tries to shore up support for CEO attempting to turn around troubled coal company

Monty Rakusen | Cultura | Getty Images

Company: Contura Energy, Inc. (CTRA)

Business: Contura is large scale provider of metallurgical (“met”) and thermal coal. The company has mining operations across coal basins in Pennsylvania, Virginia and West Virginia. It supplies both metallurgical coal to produce steel and thermal coal to generate power. The met coal business is the largest producer of coking products, which are critical components of steel production. The met coal business makes up more than 75% of the company’s total revenue. The thermal coal is primarily sold to the domestic power generation industry.

Stock Market Value: $118 million ($6.45 per share)

Activist: MG Capital Management

Percentage Ownership:  5.8%

Average Cost: $4.33

Activist Commentary: MG Capital is an investment company managed by Michael Gorzynski since 2011. Prior to that Gorzynski was an analyst at Third Point for five years, and now seems to be taking a page out of Dan Loeb’s book. Gorzynski’s only other 13D filing was made in early 2020 where he was able to settle at HC2 Holdings for two board seats on the six person board after nominating a full slate of six directors.

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What’s Happening

On October 7, 2020, MG Capital sent a letter to the company’s board expressing its belief that the company cannot begin to fully reverse its years-long tailspin until it accelerates its intended exit from the thermal coal business and refreshes half of the six-person Board. MG Capital noted that in particular, legacy directors John Lushefski, Daniel Geiger and Albert Ferrara, Jr. lack the expertise and skills to support a turnaround in today’s new energy economy. MG Capital stated that they are prepared to share proposed candidates with the company and hopes that a company representative will quickly engage with them. They end the letter by advising the company that although not their first choice, they are prepared to nominate directors to the board ahead of the 2021 annual meeting if the incumbent board forces them to do so.

Behind the Scenes

Gorzynski is familiar with Contura Energy — the predecessor company, Alpha Natural Resources acquired Massey Energy, a company that Dan Loeb went activist on in 2005 when Gorzynski was an analyst at Third Point. Over a decade later, Gorzynski was involved with the company’s restructuring after emerging from bankruptcy in 2016. In connection with the company’s bankruptcy emergence, it was split into two main companies – Alpha Natural Resources and Contura Energy; however, the companies ended up merging back into Contura Energy in 2018.

The company brought on a new CEO, David Stetson, in July 2019, and MG Capital believes he has done an exceptional job navigating this year’s difficult market environment, they support his decision to begin exiting the thermal coal business and are impressed with his focus on containing costs and targeting debt reduction. They just believe he deserves a board that will better support the direction he is heading in.

One half of the company’s board was inherited from its pre-bankruptcy predecessor and MG Capital takes issue with many of the decisions this Board has made. For example, the sale of the Powder River Basin, one of the largest coal mining areas in the US, was botched, resulting in the assets being returned to the company. Additionally, instead of focusing on reducing debt, the company bought back stock at peak cycle prices while the three directors were periodically selling their own personal holdings of Contura stock.

MG Capital points out that this board has overseen tremendous destruction in shareholder value – since hitting its all-time high of $81 per share on September 23, 2018, the company’s stock has fallen 90%, and over the past 1 and 3 year periods, the stock has returned -66.41% and -86.66% compared to 16.46% and 34.25% for the S&P 500, respectively. MG Capital is also disappointed that the board members have not taken a cut in their pay despite shuttering assets, furloughing employees and overseeing hundreds of millions of dollars in value destruction.

MG Capital is looking to refresh the board to support management’s focus on coking products, various efficiencies, cost containment, becoming more cost competitive and paying down debt, which can eventually allow the company to resume its buyback program.

If this goes to a proxy fight, MG Capital should have a reasonable chance of victory – prior to its last annual meeting, ISS recommended that the company’s stockholders withhold votes for an astonishing 50% of the Board, and the three directors that MG Capital singled out received the highest number of withhold votes at last year’s annual meeting (Lushefski-29%; Geiger-17% and Ferrara, Jr.-35%). While this might look like an ESG campaign, MG Capital is not an environmental activist. This is just a situation where enhancing shareholder value happens to align directly with strengthening the Company’s ESG practices.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.

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Author: Kenneth Squire

The Fed could face more pressure to act: ‘They don’t have the luxury of time anymore’

Joggers pass the Marriner S. Eccles Federal Reserve building in Washington, D.C., on Tuesday, Aug. 18, 2020.
Erin Scott | Bloomberg | Getty Images

With inflation still elusive and a host of questions surrounding an economy that just set a single-quarter record for growth, the Federal Reserve faces a choice of whether to wait for conditions to unfold further, or act now to provide some extra help.

Most market participants expect the Federal Open Market Committee to sit on its hands when it holds its policy meeting Tuesday and Wednesday.

However, officials are expected to discuss the policy options open to them at this point, and with so much uncertainty surrounding the current situation it wouldn’t be that big of a surprise to see them make some kind of move.

“I just don’t see the benefits of waiting until December,” said Aneta Markowska, chief financial economist at Jefferies. “A lot has changed in the past two weeks. Almost all the worries they flagged in September have materialized or are in the process of materializing. So they don’t have the luxury of time anymore.”

That sense of urgency sounds incongruous with an economy that just recorded a 33.1% annualized GDP gain in the third quarter and one that has restored 11.4 million jobs since May and is in the midst of a housing boom.

However, economists at the Fed and elsewhere worry that the best of the gains are behind while the major tailwind of government stimulus funding has dried up. Rising coronavirus cases are sparking worries of renewed economic pressure as communities face pressure to reinstitute restrictions on businesses.

And the Fed’s got another problem on its hands: a market that doesn’t necessarily believe in the central bank’s recently adopted effort to push inflation higher and promise not to raise interest rates until that goals is met.

Inflation expectations, according to market indicators, actually have edged lower since the Fed approved an approach in which it will let inflation run above its 2% goal after periods, like much of the past decade, where it has fallen below that level. In the past, the Fed had used falling unemployment as a pre-emptive signal to raise rates to stave off inflation, something it will no longer do.

A Commerce Department report Friday indicated that headline inflation, under the Fed’s preferred gauge, nudged up to 1.4% for September, still well below the central bank’s desired pace.

“The market just wanted more follow-through and obviously hasn’t gotten it,” Markowska said. “In September, maybe they felt like there was no urgency to do anything immediately. What has changed between then and now is the urgency has increased.”

A change to Main Street

In fact, the Fed already has taken one additional measure that the market had been watching out for.

The Fed announced Friday it was easing some of the conditions around its Main Street Lending Program for small- and medium-sized businesses. The central bank slashed the minimum loan to $100,000 from $250,000 and eased the debt restrictions for applicants.

Beyond that, policymakers have a diminishing number of options that Fed officials themselves have expressed varying levels of doubt over.

“If a severe winter virus resurgence proved more economically damaging than we expect and the FOMC wanted to respond, its options would be limited,” Goldman Sachs economist David Mericle said in a note. “The most likely response would be to adjust the composition or pace of asset purchases, but Fed officials have expressed only lukewarm support for such a move because they see it as unlikely to be particularly effective.”

Indeed, market participants widely expect the Fed’s next move would be to alter its asset purchasing program. The Fed is buying a minimum of $120 billion a month in Treasurys and mortgage-backed securities, and it could change the composition of those purchases to achieve various ends.

For one, it could simply expand the level it is buying. It also could extend the duration of the bonds to influence yields further out on the curve. Finally, the Fed can continue to alter the language it uses to frame the goals of the purchases, from facilitating market functioning to broader support of the economy.

“For the time being, we think there is little more the Fed will do, but [Chairman Jerome] Powell will likely reiterate that it is willing to do what is necessary to provide support to the economic backdrop,” economists at RBC Capital Markets said in a note.

“While we don’t expect the Committee to make any changes at this meeting, if the early days of the virus are any indication, we do expect the Fed would not hesitate to act swiftly if case counts rise to such an extent that state governments start closing down sectors of the economy,” they added.

The Fed will be watching financial conditions closely in the coming days, and its meeting will conclude a day after a presidential election whose results could provide direction for how aggressive the fiscal stimulus might be.

The recent stock market decline is one thing officials will pay attention to, as is tightening in lending standards as well as the pressure put on consumers from a potential virus-induced economic slowdown.

While the committee may choose not to address those items specifically in its post-meeting statement Powell will get a chance in his press conference afterwards.

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Author: Jeff Cox