The Manchin Fed
Let’s do a quick run through two topics impacting the economy and markets.
Federal Reserve monetary policy. On Wednesday, the Fed left interest rates and monetary policy unchanged. This was not a surprise. (Statement and Presser)What did change was the members’ expectations on inflation and when they would begin to raise interest rates. On inflation, the number of members on the committee thinking inflation had risks to the upside jumped from 5 to 13. Clearly, they are finally acknowledging what the inflation data has been screaming for 3 months. On interest rate hikes, the median projection by members of when they will begin to raise interest rates is by the end of 2023, compared to the March meeting where there was no expectation.
Why This Matters. the Fed will be a laggard in their acknowledgement of inflation risks and subsequently, when they will raise rates. They have a 2020 policy agenda on employment they want to meet before they consider ending the massive pandemic stimulus they are currently providing. They are clearly erring on the side of higher inflation, lower unemployment and will continue to manipulate (QE $120B a month) the US Treasury market to achieve it. For the markets and interest rates, this means the Fed is FINALLY indicating an end date to their current, unnecessary and inflationary policy. The big challenge is what happens to their expectations if Congress passes two more stimulus (infrastructure) bills? Read on.
Senate Filibuster. On Wednesday, US Sen. Joe Manchin (D,WV) released a 3 page document outlining his list of demands for changes to the For the People Act of 2021 (FTPA). The key points are requiring two weeks of early voting, things to eliminate partisan gerrymandering of congressional districts, voter ID requirements and allowing local election officials to purge voter rolls using other government records. The first two are aligned with the Democrats and the last two are aligned with the Republicans. Here’s the key quote by Manchin, ““You should not pass any type of a voter bill in the most divisive time of our life,” he said. “Unless you have some unity on this thing, because you just divide the country further.” (WaPo)
Why This Matters. This is the first time we’ve seen Manchin specifically lay out his agenda for a controversial piece of legislation like FTPA. This could be the manner in which Manchin approaches the pending infrastructure bills and gives insights into how Senate Majority Leader Schumer (D,NY) can work with Manchin. It may also be a roadmap for how Schumer can piecemeal end the filibuster to pass legislation. The current negotiations on the American Jobs Plan or the more physical infrastructure plan will likely be passed on a bipartisan basis and cost $1.2T. The American Families Plan or the social infrastructure plan is the one where Manchin will play a key role. The ice may be breaking on getting it done.
Bottom line: Tying these together, the Fed will be “surprised” at sustained inflation and economic growth should Congress pass both infrastructure bills. They will be late to contain inflation by raising rates and will clumsily indicate changes in monetary policy after being forced by the markets to do so. When the economic facts change but your policy agenda does not, this is when you create volatility and uncertainty for the financial markets. Expect it.