The Least Appreciated Story in Washington
Author: Greg Valliere
January 26, 2024
YOU COULD WALK THE HALLS OF CONGRESS all day long and not find more than a handful of lawmakers who understand what the economy is doing. Republicans will say on the record that the economy is in terrible shape, while Democrats will go off the record to bemoan an economy that could cost Joe Biden the presidency in November.
THE TRUTH, OF COURSE, is that the economy is in remarkably good shape — so good that a growing case can be made that the Federal Reserve doesn’t have to cut rates any time soon, not with unemployment at 3.7% and inflation slowly retreating.
THE DEEP THINKERS ON WALL STREET were predicting, a year ago, that a recession was likely by summer. Actually, GDP grew by grew by about 4% in the second half, far above the 2% that Wall Street forecasters expected.
THE PRIZE FOR BAD FORECASTING, as usual, has to go to the Federal Reserve. The central bankers were totally blindsided by inflation three years ago — dismissing it as transitory — and the Fed got the GDP story wrong. Yet the Fed sets the group-think tone in Washington on the economy.
IF THE FED THINKS A RECESSION IS IMMINENT, members of Congress uncritically accept that assessment, and the press — which loves to run with bad news — will lap it up. The gloom and doom from Lawrence Summers got enormous publicity this past summer, which fed into the public’s anxiety and about the economy. Has there been a mea culpa from Summers for his spectacularly inaccurate forecasts?
ADMITTEDLY, PREDICTING THE ECONOMY has been particularly difficult because there were few precedents after a severe pandemic. But a little humility, especially from Wall Street, might have calmed investor anxiety.
AS EVERY FORECASTER KNOWS, there are wild cards that can quickly change the outlook; perhaps a supply chain crisis is looming because of fighting in the Red Sea, or maybe a season of hurricanes later this year could strike the U.S. No one knows.
FOR THE HAPLESS BIDEN, who spent too much money on covid aid and infrastructure, the economy should be a plus for his re-election, but the pervasive national consensus on the economy makes that unlikely. We were at a retail investor conference this week, where the idea of a strong economy was viewed as delusional.
IF IT AIN’T BROKE, DON’T FIX IT: The last thing this economy needs is more monetary or fiscal stimulus, but both parties will be tempted to make promises ahead of the election. Democrats will want to spend more, while Republicans will start agitating for more tax cuts — and everyone will urge rate cuts.
OUR ADVICE is to leave well enough alone — the economy doesn’t need any help because it’s already remarkably strong.
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