Confidence is Slipping — Fed to the Rescue?
Author: Greg Valliere
July 8, 2021
THE GREAT WILD CARD for the markets and the economy is always confidence — and suddenly it’s slipping. Signs of anxiety are pervasive:
An outbreak of the Covid delta variant, which could keep some people from returning to work.
Fears that the economy will be only good, not great — below expectations just a few weeks ago.
Shortages everywhere, from semiconductor chips to service workers.
Consumer concerns about inflation; it’s probably transitory but gasoline and food prices have a huge impact on consumer psychology.
The inability of the U.S. to stop hacking and ransom demands that are crippling cities, hospitals, businesses, etc.
Signs of Washington gridlock on more economic stimulus, as bipartisanship wavers.
Out-of-control urban gun violence, with little hope for police reform or gun restrictions.
HOW TO PULL OUT OF A FUNK: The biggest factor, as usual, may be the Federal Reserve. Fed officials obviously are aware of the anxiety that has generated huge demand for the Treasury 10-year bond, sending yields sharply lower. This seemingly confirms what Chairman Jerome Powell has stated for many months — we’re not out of the woods yet.
SO WE ANTICIPATE A SIGNAL FROM THE FED — perhaps after the July 27-28 FOMC meeting, perhaps even earlier — that a tapering of its asset purchases is not imminent. The Fed started sounding a bit hawkish a few weeks ago, but we suspect the central bankers may now realize that they talked about tapering too soon.
THE SUDDENLY JITTERY MARKETS need a dose of confidence, a sign that the economy is nowhere close to a significant slowdown. That shifts the spotlight to the Fed, which is likely to send a signal. If that doesn’t work, fiscal policy stimulus could heat up in a hurry; 2022 is an election year, after all.
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