Joe Biden’s Three Constituencies; the Fed Nears a Decision
Author: Greg Valliere
August 17, 2021
YESTERDAY’S SPEECH BY PRESIDENT BIDEN reinforced our belief that there are sound reasons for leaving Afghanistan — but the exit was appallingly inept. So what’s the impact on Joe Biden’s presidency? He has three constituencies, two of which are scathing:
1. The global criticism has been withering, as allies like Germany complain that they were not consulted; an Afghan migration crisis will worsen in much of Europe. And adversaries like China and Russia see an opportunity — they already have reached out to the Taliban.
The great geopolitical concern is that al Qaeda becomes a major force once again, focused on destabilizing Pakistan, which has over 100 nuclear weapons. Even if just one or two nuclear weapons slip out of Pakistan, that could make this week’s crisis look tame by comparison.
2. The Washington establishment, which is aghast after this week’s debacle, will become a major problem for Biden. All Republicans and some Democrats will demand hearings and more hearings; Secretary of State Anthony Blinken and national security adviser Jake Sullivan will become piñatas, their influence diminished. Biden’s political capital also will diminish.
3. The American public is the third major constituency, the audience Biden clearly was speaking to yesterday. The public has been strongly opposed to the 20-year war. Biden undoubtedly is betting that the public won’t focus on Afghanistan, but that’s because they’re more concerned over booster shots, inflation, urban crime, etc.
BOTTOM LINE: Of three Biden constituencies, two clearly are angry and the third has other issues that won’t help him. Republican prospects in the 2022 election have improved; if the focus in the next year is on atrocities in Afghanistan, especially toward women, Biden will lose the House and Senate.
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THE BIG WASHINGTON STORY FOR MARKETS is the path of Fed policy, which is now coming into focus. Ahead of the Aug. 26-28 Jackson Hole conference, it appears that the central bankers have reached a consensus on taping of asset purchases, according to a piece this morning by Nick Timiraos in the Wall Street Journal.
THERE’S GROWING AGREEMENT within the Fed that asset purchases will be tapered this fall, with an announcement coming at the Sept. 21-22 FOMC meeting. The actual taper would begin later in the fall, perhaps ending by next summer. If the labor market continues to move toward full employment, the door would be wide open for a rate hike by late fall of 2022.
THERE WILL BE PLENTY OF CAVEATS: They include the Covid variant, which still hasn’t peaked and probably will require booster shots; slowing economic growth in China; and uncertainty over the next infrastructure bills. These and other factors could prompt the Fed to complete its tapering and then wait before hiking the fed funds rate.
BUT A FED TAPER, starting later this year, is now highly likely; it’s just a question of when, not whether. We think this will not rattle the markets, because it’s been telegraphed clearly (unlike in 2013) and the economy is growing. But have the markets factored in eventual rate hikes? Probably, but not definitely.
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