The Fed likely won’t taper asset purchases this calendar year. It should, but it won’t.
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We previously mentioned mid-term elections as one reason why the Fed won’t take away the punch bowl. Second, the Labor Participation rate – a key economic indicator for the Fed – has zero chance of reaching pre-pandemic levels so long as Federal unemployment benefits are in effect. Those benefits will not expire at the earliest until September 6th 2021. We believe the Fed will want to observe positive changes in the Labor Participation rate (currently at 61.7%) for several months before deciding to taper. That puts us in January 2022 at the earliest. We have previously written that we do not believe those Federal unemployment benefits will expire on September 6th but that they will be renewed for a period, perhaps for an additional 6-12 months. A 6-month benefit extension would put us in February/March 2022 at which point those benefits would need to be extended again to get past the November 2022 Congressional mid-term elections. If you have read between the lines it is clear that the Biden Administration/ Congress/ Yellen are controlling not only fiscal policy, but monetary policy. So much for Fed independence. Powell is but a figurehead at this point. We expect Powell to retire in 2022. As to the issue of “transitory” inflation we say “hogwash”. Companies can’t flex capacity on-demand. New capacity that comes on-line is here to stay and the expenses associated with ramping-up capacity will be passed on to consumers for an extended period of time. All this to say that the Fed has lost control of inflation. This loose fiscal spending / monetary expansion hybrid policy will blow up next year. It is blowing up now for some families who are feeling real financial pain as a result of the inflation tax. The Biden Administration will take the hit and we are likely looking at a one-term Administration.