by Greg Valliere, AGF Management Ltd.
Insights and Market Perspectives
AMID ALL THE BREATHLESS PREDICTIONS OF RATE HIKES comes this startling possibility: what if economic growth rapidly decelerates — or even stalls — in the first quarter?
THE CLOSELY-WATCHED ATLANTA FED forecast is for GDP growth of only 0.1% this quarter, and suddenly economists are shaving their predictions after a strong inventory-fueled bounce in the fourth quarter. The omicron variant, nasty weather and consumer anxiety over inflation may suppress growth in this quarter.
THIS COMES AFTER WALL STREET ANALYSTS seemingly were in a bidding war to see how high they could go on rate hike predictions. Many top experts are calling for four or five rate hikes this year, but will the economic data justify that?
A RATE HIKE SEEMS VIRTUALLY CERTAIN at the March 15-16 FOMC meeting, but chances of a 50 basis point move have dropped significantly. Another 25 basis point hike is likely at the May 3-4 session, but by summer policy will be data-driven.
DECENT ECONOMIC GROWTH IS STILL POSSIBLE this year because of all the stimulus in the pipeline; most states are flush with cash, and not all of the 2021 Covid and and infrastructure outlays have been spent. Plus, the hot labor market ensures good real disposable income.
BUT WE SUSPECT THAT FIRST QUARTER DATA will be surprisingly downbeat. As our friend Jeff Cox writes today on the CNBC web site, the economy unquestionably is decelerating — and suddenly the forecast of multiple rate hikes are being scaled back as monetary and fiscal policy looks less accommodative.
EARLIER IN THIS NEW YEAR, Bank of America predicted seven rate hikes in 2022. That forecast suddenly looks very wrong.
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EVERY SCENARIO HAS ITS WILD CARDS, and the big one for Congress is the health of its members. So there were shock waves in the 50-50 Senate yesterday over the news that Democratic Sen. Ben Ray Lujan of New Mexico, only 49 years old, suffered a stroke and subsequently underwent decompressive surgery.
LUJAN IS EXPECTED TO MAKE A FULL RECOVERY, but the issue is how long he will be gone. Sources we talked with yesterday are confident that the Biden Administration will have the votes to confirm its Supreme Court nomination this spring, because a handful of Republicans will approve her — but the Build Back Better (BBB) bill is another story.
IF LUJAN IS OUT FOR SEVERAL WEEKS, there’s no chance that the BBB legislation can move, since all of the 50 Senate Republicans are opposed, while the Democrats will have only 49 votes as long as Lujan is gone. With several Senators (in both parties) now in their 80s, health suddenly has become a dominant issue on Capitol Hill.
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This post was first published at the AGF Perspectives Blog.
