Changing Our Call on the Social Spending Bill and Fed Policy

Insights and Market Perspectives

Author: 8

November 11, 2021

Changing Our Call on the Social Spending Bill and Fed Policy
November 11, 2021
THE LIKELIHOOD OF PERSISTENTLY HIGH INFLATION for months to come will have to prompt a mid-course correction in fiscal and monetary policy - and we're changing our call on President Biden's social spending bill and the overly cautious Federal Reserve's tapering of asset purchases.

A FIRESTORM OVER INFLATION has arrived in Washington, where Democrats are in a near-panic over the 2022 elections and Republicans argue that too much stimulus is backfiring.

REGULAR READERS KNOW THAT WE THINK the economy has gotten too much medicine this year. To be charitable to Biden, there's no playbook for ending a once-in-a-century pandemic; economic dislocations were inevitable in these uncharted waters.

BUT THAT'S NO EXCUSE TO STICK WITH POLICIES that are making things worse. Sen. Joe Manchin may be a camera-hungry opportunist, but he's correct: it's time to reconsider spending another $2 trillion on an economy that's over-heating. Democrats on Capitol Hill acknowledge privately that the spending package may have to be delayed until inflation cools off.

SO WE'RE CHANGING OUR ODDS ON PASSAGE of the Build Back Better bill, the massive cradle-to-grave spending package that also includes several tax increases. With the Senate tied, 50-50, even one Democratic defector can kill the measure, and Manchin is prepared to pull the trigger.

WE DON'T RULE OUT A MODEST BILL that extends the child tax credit - but in a climate of rising inflation, is there a need right now for liberalizing the state and local tax benefit or adding more housing aid when not all of the money in May's $1.9 trillion bill hasn't been spent?

OTHER CONGRESSIONAL PRIORITIES: Between Thanksgiving and Christmas, Congress will have to raise the debt ceiling, fund the government, and pass a massive Pentagon spending bill that could be the vehicle for other provisions (a classic "Christmas tree" bill). Is there time, in this crowded agenda, to pass Build Back Better?

OUR ODDS NOW ARE ABOUT 60 PERCENT that the entire package stalls, perhaps temporarily, perhaps permanently. There's a 40 percent change that something scaled-back could still pass.

AS FOR THE FEDERAL RESERVE, LET'S BE BLUNT: Chairman Jerome Powell got inflation wrong; for all of the spring and summer, he thought it would be temporary - and now Powell is way, way behind the curve.

THIS ISN'T AN ARGUMENT FOR LAEL BRAINARD as the next Fed Chair, because she probably would have been as dovish on inflation as Powell has been. But sticking with a policy that isn't working makes little sense. We think the Fed will have to consider speeding up its tapering of asset purchases, with a goal of rate hikes starting by summer.

A TOUGH FED CHAIRMAN (see: Paul Volcker) can crush inflation, but the markets have to be convinced that the central bankers are serious. Just as fiscal policy has been too stimulative, monetary policy has as well. We reiterate: inflation is becoming a firestorm in Washington, and policies will have to change.
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A SALUTE TO VETERANS on this somber day, which honors the ultimate sacrifice of millions in the Great War, which ended on the Eleventh hour of the Eleventh day of the Eleventh month of 1918. The war's end was followed by a pandemic far worse than the recent one; our grandparents and their parents were never the same.

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