To Taper Or Not To Taper, That Is Jackson Hole’s Question

Stocks opened slightly higher this morning on the heels of yesterday’s rally. At the moment, the Dow is up 128 points and the S&P 500 is up .27%. Banks are up over 2% as interest rates rise. Industrials, energy and materials—sectors that typically rise when inflation is rising—are also rallying. The bond market is selling off today with the biggest losses in safe-haven Treasuries. The 10-year US Treasury Note yield has backed up to 1.33% from 1.22% this month. Capital markets are beginning to build in some expectation for gradual removal of economic stimulus by the Federal Reserve.

Recently I pointed out a growing consensus among investors that the Federal Reserve will soon announce a tapering of its quantitative easing, or bond-buying, program. Rising inflation sparked by a strong economic recovery seem to be crying out for a removal of unprecedented monetary stimulus. And this week’s Jackson Hole Economic Symposium provides the perfect venue for such an announcement. Not so fast, says Bloomberg opinion columnist Daniel Moss. First, a review of Fed chief Jerome Powell’s 2018 Jackson Hole speech suggests he won’t be quick to tighten. At the time, Powell “argued policy makers shouldn’t feel compelled to hasten tightening just because conventional wisdom, anchored in past anxieties about runaway inflation, says they should.” In addition, this year’s symposium comes at a time when Covid’s Delta variant is in the ascent. Finally, China’s economy slowed unexpectedly in July and the communist central bank is actually loosening monetary policy by cutting bank reserve requirements. Mr. Moss says, “If Beijing is getting nervous, the Fed needs to pay attention.” Do we really believe Powell will ignore these risks and announce a tapering plan?

American Airlines (AAL) and Southwest Airlines (LUV) issued profit warnings due to the impact of Covid-19 Delta. Sales are slowing and people are apparently canceling flight reservations. Southwest said it may not be profitable during the third quarter. An executive at American said this will “continue to be a very choppy recovery.”

The Biden Administration’s pursuit of a large infrastructure spending package just took another step forward. Democrats in congress have set out two parallel courses. The first is a roughly $1 trillion bill with bipartisan support focusing on traditional infrastructure (roads, bridges, water, broadband, etc.). The second is a much larger $3.5 trillion package that focuses more on healthcare, education and clean energy. This latter bill is the real priority for the Biden Administration and House Speaker Nancy Pelosi. Typically, huge spending bills require 60 votes in the Senate, which the Democrats don’t have. There is a procedural way around, however. If both houses of congress pass a smaller spending bill, they can then send their respective bills to a special reconciliation committee, which has the power to materially change the final product. Yesterday, the House narrowly passed a $3.5 trillion budget, which opens the reconciliation option. The Senate already passed a similar bill in a party-line vote. And by the way, the Senate also passed a version of the $1 trillion package. Republicans don’t matter much in this debate. The real fight is between centrist and liberal Democrats in congress who disagree on what is fiscally responsible and what is not. In return for support on the $3.5 trillion budget bill, centrists managed to secure Pelosi’s promise that the House will actually vote on the $1 trillion spending package before September 27^th. This theoretically means that the $1 trillion bill will come first, potentially “diminish[ing] liberals’ leverage in the coming negotiations..” according to the Wall Street Journal.