The Covid Variant and Policy Paralysis May Slow the Fed’s Tightening Path
Author: Greg Valliere
November 29, 2021
THE SIMPLE TRUTH this morning is that no one is sure what the Omicron variant will do, and no answers from scientists are likely for another two weeks. Thrice-vaccinated individuals are probably safe, but nothing is certain, which brings us to the world of Washington policy dysfunction, always a dominant uncertainty every December.
THE MOST IMPORT WASHINGTON ANGLE as this new variant spooks the world is that a speed-up of Federal Reserve policies, leading to a rate hike by summer, now looks a little less likely.
WE DON’T EXPECT LOCKDOWNS IN THE U.S. — that’s politically radioactive — but even before the Omicron news late last week it was clear that Covid and the delta variant are far from curbed in this country and abroad. It’s still an economic headwind, despite staggering fiscal and monetary stimulus.
AS THIS FRIDAY’S UNEMPLOYMENT DATA IS LIKELY TO SHOW, the U.S. economy is humming, but the uncertainty of Omicron may reduce concerns about surging inflation and over-heated GDP growth. One week ago the risks to the economy were upside risks; now the risks look more balanced.
AND OF COURSE THERE’S ANOTHER RISK: Policy dysfunction, as Congress returns this week to confront four enormous issues amid the usual partisan bickering that will drag on into next year. Here’s our take on these four issues:
1. A massive defense spending bill, costing about $768 billion, is fairly close to passage, although a controversial amendment to fund more aggressive manufacturing competition with China is not resolved.
2. A government shut-down this Friday will be avoided, as still another continuing resolution will pass, extending funding for a couple of months, maybe more. This is light lifting, the easiest of the four issues to handle.
3. The Senate will begin making changes to the House-passed Build Back Better bill, the $2 trillion cradle-to-grave tax and spending blowout that still doesn’t have support from key Sen. Joe Manchin. A “kick the can” option is possible on this as well.
4. Extension of the federal debt ceiling is necessary by year-end. Senate Majority Leader Chuck Schumer has refused to use the budget reconciliation process to raise the debt ceiling, but he may have to cave on this. Or “kick the can” may become an increasingly likely option. In any event, the U.S. will not default on its debt; if such an unthinkable option is looming, the Fed may have to intervene.
CALL US CRAZY, but the big picture isn’t totally bleak this morning. Congress will do the minimum and avoid train wrecks, while the widely anticipated surge in interest rates may stall until there’s clarity on Omicron. Decent economic growth with fairly steady interest rates and a little less frothy inflation is not a bad scenario.
WE THOUGHT LAST FRIDAY that thinly traded markets over-reacted to this new variant, and we still think that; so much is unknown. Vaccines and testing are the answers, as the world learns to cope with a virus that will be with us — with surges and lulls — for the foreseeable future.
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