AGF Management : A Last-Minute Snag Complicates the Fed’s Tapering Plans

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Author: 8

September 22, 2021

A Last-minute Snag Complicates the Fed's Tapering Plans
September 22, 2021
ONCE AGAIN, THE DYSFUNCTIONAL CONGRESS has complicated the Federal Reserve's monetary plans. The issue, simply, is whether the central bankers can set a clear path on tapering of asset purchases when fiscal policy is in chaos.

A GOVERNMENT SHUTDOWN late next week is an increasingly plausible threat. A vote yesterday in the House to raise the debt ceiling and keep the government open was a fake-out; there's no chance that the Senate will approve a bill that contains a debt ceiling hike.

EVENTUALLY THERE MAY BE A KICK-THE-CAN vote that will keep the government open on Oct. 1, but a debt ceiling hike will require someone to blink - and that's not imminent.

SO FOR MILLIONS OF AMERICANS, anxiety will rise over over their federal checks - for everything from the child tax break to Social Security. The debt ceiling eventually will get raised, but there are weeks to go before that happens.

WE CONTINUE TO CITE A COLLEAGUE who believes confidence is the greatest source of economic stimulus, but unfortunately confidence will ebb as this fiscal crisis deepens.

THE BIDEN AGENDA - from immigration to crime to the $3.5 trillion social spending bill - is now in great doubt, and his polling numbers have plunged. With consumers increasingly uncertain and the labor market in uncharted waters, is this the right time to announce a tighter monetary policy?

WE IMAGINE THAT THE DEBATE within the Fed has been spirited this week; the Fed already is grappling with the embarrassment that some central bankers are active traders, and now they have to address a tapering policy that could worsen the uncertainty.

THUS WE THINK CHAIRMAN Jerome Powell will have to maintain his dovish stance, stating that tapering is coming, but staying vague on the details. In a world without government shutdowns and threats of debt default, tapering by late fall would be certain, but until there's clarity on fiscal policy, the Fed may have to wait.

THE FED WILL HAVE TO BEGIN TAPERING eventually, probably by winter. A rate hike may not come until late 2022, as Fed officials go slow because the economy is so dependent on fiscal policy.

IF YOU LIKE THE GLASS HALF FULL, as we do, the inescapable conclusion is that the Fed doesn't have to move aggressively to take away the punch bowl. And the dovish Powell has his excuse to go slow - the inept Congress could plunge the country into a fiscal crisis later this fall.

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