AGF Management: Covid variant and policy paralysis could slow Fed tightening
Market insights and outlook
Author: Greg Vallière
November 29, 2021
THE SIMPLE TRUTH this morning is that no one is sure what the Omicron variant will do, and no response from scientists is likely for two weeks. Individuals three times vaccinated are likely safe, but nothing is certain, which brings us to the world of Washington’s political dysfunction, still a pervasive uncertainty every December.
THE MOST IMPORTANT WASHINGTON ANGLE as this new variant scares the world is that an acceleration in Federal Reserve policies, leading to a rate hike by the summer, now looks a little less likely.
WE ARE NOT WAITING FOR A LOCKOUT IN THE UNITED STATES – it’s politically radioactive – but even before Omicron news at the end of last week, it was clear that Covid and the delta variant are far from under control in this country and abroad. It is still a headwind, despite staggering fiscal and monetary stimulus measures.
AS THIS FRIDAY’S UNEMPLOYMENT DATA SHOWS, the US economy is buzzing, but Omicron’s uncertainty could alleviate concerns about soaring inflation and overheating GDP growth. A week ago the risks to the economy were upside risks; now the risks seem more balanced.
AND WELL SR, THERE IS ANOTHER RISK: Political dysfunction, as Congress returns this week to grapple with four huge issues amid the usual partisan bickering that will drag on into the next year. Here is our take on these four questions:
1. A huge defense spending bill, costing around $ 768 billion, is about to be passed, although a controversial amendment aimed at funding more aggressive manufacturing competition with the United States. China is not resolved.
2. A government shutdown on Friday will be avoided, as another continuing resolution will be passed, extending funding for a few months, maybe more. This is a light lift, the easiest of the four problems to deal with.
3. The Senate will begin making changes to the Build Back Better Bill passed by the House, the $ 2,000 billion Cradle-to-Grave Tax, and the spending explosion that still has no support. of Key Senator Joe Manchin. A “kick the can” option is also possible on this subject.
4. The extension of the federal debt ceiling is necessary by the end of the year. Senate Majority Leader Chuck Schumer has refused to use the budget reconciliation process to raise the debt ceiling, but he may have to give in on this. Or “kick the can” may become an increasingly likely option. In any event, the United States will not default on its debt; if such an unthinkable option looms, the Fed may have to intervene.
CALL US CRAZY, but the big picture isn’t totally grim this morning. Congress will do the minimum and avoid train wrecks, while the widely anticipated spike in interest rates may stall until there are clarifications on Omicron. Decent economic growth with fairly stable interest rates and somewhat less foamy inflation is not a bad scenario.
WE THINK LAST FRIDAY that the lightly traded markets overreacted to this new variant, and we still believe so; so much is unknown. Vaccines and tests are the answers, as the world learns to deal with a virus that will be with us – with flare-ups and lulls – for the foreseeable future.
The views expressed in this blog are those of the author and do not necessarily represent the views of AGF, its subsidiaries or any of its affiliates, funds or investment strategies.
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