The government has passed a $1.9 TRILLION spending bill, without much reason to do so. Other than to give away money. Fourth-quarter GDP was just announced to be up 4.4%, one of the strongest reads in years. The last jobs report shows a significant drop in new jobless claims. Sure $500 billion for extended unemployment and small business relief would have really helped a lot of people, but $1.9 trillion of newly borrowed money, in an economic expansion?
President Biden had an afternoon meeting with a couple of previous Presidents. Joe is interested in learning from Lyndon B Johnson (the New Society) and Franklin D Roosevelt (the New Deal) how to best implement the "Biden Plan", ie transform society in a similar, but bigger way than those two historic predecessors. According to Axios.com, the answer is "go big and do it now". This will likely put an end to the Senate filibuster. Additional spending on top of the now $1.9 trillion in spending, would be unlikely to get through the Senate with the filibuster in place. The Democrats have sent a new $3 trillion dollar package to the President for signature. Depending on what is in this new infrastructure bill, President Biden has yet to directly address the Green New Deal, which I assume will need to come along at some point to appease the far left of the party. So, what does this all mean? Expect that the deficit will hit numbers we never imagined over the next two years. There is nothing standing in the way.
Speaking of deficits, the current $4.9 trillion is more, (in today's dollars), than we spent during all of WWII. Let's see if we can look five years from now and say that we got our money's worth, as we did to win a world war.
This week was a regular Federal Open Market Committee policy meeting. At the press conference, Jerome Powell was quite adamant the Federal Reserve won’t raise rates until they see a 3.5% unemployment rate and inflation averaging 2%. He was also emphatic that he wanted to see these numbers not just forecasted but actualized, real results. We have only seen 3.5% unemployment twice, during the Vietnam war and in January 2020 before COVID hit. With the Fed trying to suppress interest rates, and no fear of inflation, expect the market to take advantage. Rates and inflation will rise into 2023.
As I’ve said before, expect volatility as the market tries to digest the new reality. Interest rates will be in a tug of war between the market and the Fed. It’s ironic, that as President Biden wants to disperse more money to close the wealth gap, low inflation and low-interest rates will continue to work against him as they will continue to grow the wealth gap. It would be a better approach to see the Fed and the President working in the same direction instead of in opposition.