by Greg Valliere, AGF Management Ltd.
NOTHING HIGHLIGHTS the ineptitude in Washington like the month of December, as lawmakers frantically attempt to compensate for a year’s worth of inaction on budget issues. This dysfunctional December will be no exception.
LET’S START WITH THE FEDERAL RESERVE, which has belatedly discovered the inflation threat that Chairman Jerome Powell underestimated during the spring and summer. He undoubtedly suspects that Friday’s jobs report will be red-hot, and wants to alert the markets that the Fed understands the threat of over-heating.
SPEEDING UP THE TIMETABLE for ending Fed asset purchases has been likely for the past few weeks; it wasn’t a surprise yesterday, in our opinion, that Powell telegraphed a late spring rate hike. The surprise is that the omicron variant could cool the economy, which the bond market may be signaling.
SO FED POLICY MAY NOT BE CLEAR until the Dec. 14-15 FOMC meeting, which will coincide with reports the scientists, also due by the middle of this month — a major uncertainty for the volatile markets. And now there’s uncertainty on Capitol Hill.
A SIMPLE EXTENTION OF FEDERAL SPENDING, keeping the government open when the deadline expires at midnight this Friday, has seemed like a safe bet. But members of both parties raised objections yesterday on issues ranging from the length of the next extension to spending levels heading into 2022.
WE TALKED WITH SOURCES YESTERDAY who aren’t ruling out a brief government shutdown this weekend into early next week, before a deal that extends funding well into the winter. Not a huge story for the markets, although it’s a warning signal of even bigger fights that lie ahead.
THE JAN. 20 STATE OF THE UNION ADDRESS could become the new deadline to finish work on President Biden’s Build Back Better bill, and perhaps even for resolution of the debt ceiling extension.
A SHAKY PREMISE: All the upcoming votes — from the FOMC and Congress — depend on the hope that the omicron variant will be contained and treatable, with only a modest impact on the economy, which seems to be the market consensus. If there’s evidence to the contrary, all bets are off.
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A TRIAL BALLOON: Biden Administration officials have floated the name of a progressive ally of Sen. Elizabeth Warren to become the Federal Reserve’s top banking regulator. Richard Cordray, who previously served as head of the Consumer Financial Protection Bureau, would be quite a consolation prize for the left, which wanted Lael Brainard to become the next Fed Chair.
CORDRAY WOULD FACE STIFF OPPOSITION in a confirmation hearing; Louisiana Sen. John Kennedy (R) said yesterday that Cordray is “to the left of Lenin.” Another left-wing nominee, Cornell professor Saule Omarova, is unlikely to win confirmation as Comptroller of the Currency.
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This post was first published at the AGF Perspectives Blog.