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March 26, 2021

Review the latest Weekly Headings by CIO Larry Adam.

Key Takeaways

• Signals Americans will spend recent stimulus checks
• Chair Powell will continue to assuage inflation fears
• Fed is expanding commentary outside dual-mandate

Extra! Extra! Read All About It! While there has been no shortage of market-moving headlines since the pandemic began last year, this week’s press was captivated by Chair Powell and Secretary of the Treasury Janet Yellen’s testimony to Congress and by Biden’s first presidential press conference. The cover story for 2021 has been the better and quicker than expected economic recovery, but aggressive fiscal stimulus and accommodative monetary policy have been two key features in support of economic growth. Congress’ passage of a $1.9 trillion Rescue deal with potential plans for an infrastructure package later this year, combined with the Federal Reserve’s (Fed) reassurance that interest rates will be on hold through 2023 have contributed to consensus 2021 GDP estimates rising from 4.0% to 5.1% since the beginning of the year. Given that policymakers will continue to shape the recovery story, we’ll address the actions that have or will continue to make headlines.

• Fiscal Policy—Bottom Line | Whether it be through compromise or budget reconciliation, the Biden Administration remains committed to a post-COVID economic recovery package focused on infrastructure and social programs. The newsmaker will be how to fund these upcoming priorities, with the timing of corporate and individual tax increases being complicated by the still emerging, yet vulnerable, economic recovery and mid-term elections next year. Our Washington Policy Analyst believes that higher taxes are likely to become effective next year and fund ~50% of the plans with the remainder funded by deficit financing.
  • Rescue Deal Was Pressed For Time | Given the deadline of expiring benefits, Congress had to move quickly to pass the $1.9 trillion American Rescue Plan Act. With 84% of the total spending slated to occur within the next two years, the deal is expected to have an immediate, sizable impact on the economy. Including the previously passed stimulus, consumers are projected to have at least $2 trillion in excess disposable income. The good news is that signals suggest that the recent round of stimulus checks are more likely to be spent than saved. As restrictions roll back, real-time indicators such as Google search trends for ‘flights’ and ‘hotel’ are at a 12-month high, indicative that pent-up consumer demand will be realized in the months ahead.
  • Hard Pressed To Build Back Better | The initial plans for a Recovery stimulus deal have a price tag of ~$3 trillion, but the proposed structure of the package differs from those of previous bills. Instead of immediate spending, this proposed bill’s funds will be evenly dispersed over the next 5-10 years. Given that the bill is not specifically geared toward the pocket of the US consumer (consumer spending accounts for ~70% of GDP) through direct checks, it is not expected to deliver the same positive short-term shock to the economy as the previous rounds of fiscal stimulus have done.
• Monetary Policy—Bottom Line | Chair Powell has stated that the Federal Reserve is “not even thinking of thinking about raising interest rates,” and the current schedule of bond purchases is expected to continue for the foreseeable future. We believe the market expectation of 2-3 hikes by 2023 is premature, and instead hold the view that the Fed will be on hold through 2023 as it seeks to accomplish its dual mandate of price stability and full employment.
  • Full Court Press On The Fed’s Inflation Views | As improvements were made on the vaccination front, mounting optimism that the economic recovery would occur sooner and be more powerful than originally expected was accompanied by inflation concerns. Chair Powell has assuaged the angst by reaffirming that the Fed does not “expect the effects on inflation will be particularly large or persistent.” While inflation data has been muted thus far, we, alongside the Fed, are expecting a transitory, modest uptick in inflation in the coming months as economic activity accelerates. However, our economist, Scott Brown, does not believe a sustainable surge will persist primarily because of the lack of wage pressures and on-going labor market slack.
  • Pressing For The Expansion Of The Mandates | As the Fed is willing to allow inflation to overshoot its 2% target, its bigger concern appears to be returning to full employment. But recent announcements have suggested that the Fed is considering expanding the scope of this mandate. Chair Powell has voiced concerns regarding the breadth of the economic recovery, highlighting specifically the racial inequity in terms of employment and wealth. Given disparities such as Black workers experiencing a rise in unemployment in the month of February (+0.7%) while the aggregate index declined, it is unlikely the Fed wavers in its efforts to support a broad-based recovery until gaps such as these narrow.

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