What Can Washington Do as a New Covid Crisis Explodes?

by Greg Valliere, AGF Management Ltd.

THE FOCUS ON JOE MANCHIN and what he might accept next year has been eclipsed in the past 48 hours by a much bigger development — the need for emergency aid and other responses to the stunning rise of the omicron variant, which may send the economy into another downward spiral.

THIS NIGHTMARE SCENARIO has one chilling feature — it’s breaking through, rapidly, among individuals who already have three shots. It may not hospitalize or kill as many people as the lethal Delta, but the unvaccinated face staggering consequences. Only 61% of Americans have two shots; stunningly, only 28% have had three.

FROM THE NATIONAL FOOTBALL LEAGUE to Broadway shows, the impact may only worsen in coming days — an enormous challenge for the reeling Biden Administration. The president will have to do more than urge vaccines; he may have to provide more aid.

THERE ARE STILL BILLIONS LEFT from last spring’s $1.9 trillion covid aid bill, but the need to aid businesses and cities could gobble that up within the next few weeks. Biden, in his national address tomorrow, will have to at least hint at more federal aid. And his insistence on resuming student loan repayments looks politically risky in this climate.

AS FOR THE MANCHIN DEBACLE, how clueless has the White House and most Democrats been? The West Virginia maverick made it clear during the summer that $1.5 trillion was his limit, but hubristic progressives thought they could change his mind. We never thought that would succeed — and for the record, we wrote on Nov. 11 that the BBB bill would fail.

THE FOCUS WILL SHIFT TO PORTIONS OF THE BILL that Manchin can support; there’s an excellent list in Politico this morning. Considering the scathing criticism of Manchin from the White House this weekend, we doubt he will be in any hurry to resume negotiations in 2022.

THE BILL’S SWEEPING ENVIRONMENTAL REFORMS, spending $555 billion on green provisions, look doomed; West Virginia — and Manchin personally — will benefit. U.S. allies, who were urged to go green in Glasgow last month will see still another U.S. commitment abandoned.

BUT THE BLOATED BBB BILL will now take a back seat to urgent talks on what to do about this latest Covid crisis. Fiscal and monetary policy ordinarily would be the go-to options, but both face a more restrictive climate at the worst possible time.

COULD THE STOCK MARKET SELL-OFF, amid plunging bond yields this morning, prompt the Federal Reserve to slow its plans to begin raising rates? The end of asset purchases still looks likely by spring, but the dramatic re-assessment of GDP forecasts for the first quarter and beyond could delay the initial rate hike until summer or later.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

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This post was first published at the AGF Perspectives Blog.