The Future Course for Policy & Markets
Yesterday’s activities presented two unique visions of the future for the nation and the markets. The two who had the stage consecutively were Chair Jay Powell and President Joe Biden. Each presenter was particularly careful about word choice and remaining on script. As for the former, the word transitory will be with us for some time.
The Fed Chair had to say not at this time or essentially “no” when asked the same question repeatedly using the same verbiage in different guises. Thinking about thinking about tapering will clearly not take place for a relatively long time. What is relatively? One must think in terms of months or well into next year. A lot of the reporters covering the Fed’s Q&A questioned the definition of various qualifiers that were used. After sifting though this activity, it has become clear that the Fed will not act until real improvement takes hold for a more extended period. It was duly noted by the Chair that 8.5 million remain out of work.
The market had a measured reaction to the Q&A session. The long end for municipals was essentially unchanged.
President Biden is certainly articulating a bold vision during the first 100 days of his administration. The consideration becomes are we able to sustain a program of $6+ trillion of spending in three policy initiatives just by taxing the rich. Raising taxes back to 39.6% on the top bracket may not be such a great challenge. Elevating capital gains to a higher rate than the rate on income for those earning over $1 million could be more problematic. Ultimately, the actual yield from such a tax versus the anticipated yield is likely to disappoint. In that scenario, will others be called upon to step up and pay?
Anyone who has worked in municipals for some time and has had the opportunity to review state budgets may appreciate that tax increases that are designed to attain a certain result often come up short. Capital gains is one of the most difficult areas to gauge. Wealthy filers are often the ones who are most able to shift their behavior to arrive at a better result for them at the time of filing their returns. Anyone who has followed California is familiar with this concept. High earners will not exercise options when there are adverse circumstances for doing so and they retain the ability to delay.
For those of us who have spent considerable time working on state credits, we are accustomed to thinking in the billions. Thinking in the trillions requires more concentration and demands that we contemplate the implications carefully.
At this point in time, I was hopeful we would be further along in the infrastructure discussion than where we are at present. I appreciate that no package is likely to be seriously considered until later in the Summer before the new federal fiscal year. I was also hopeful that infrastructure would stay front and center before the American Families Plan was launched. I am fearful that infrastructure without a lot of effort on the part of all interested parties at the table may have a greater chance of fading once again despite the bipartisan agreement that something needs to be done to counteract the long-term structural decline of our existing infrastructure.
Under the American Families Plan proposal, I find it forward thinking about making community colleges free for two years and for free Pre-K programs. Both elements would boost longer term educational outcomes and would have a favorable outcome for the economy over the longer haul.
The care focused elements of the proposal would be beneficial to the direct recipients. My reservations in this area have to do with the costs over time. What if the federal government decides to pull back in the future? Would the states and localities become saddled with the responsibilities under such a scenario? States and localities already have health and welfare responsibilities to varying degrees that are challenging to cover in budgets even when the federal government shares in the burden and even when times are good. These responsibilities do not include the safety net spending that comes into play in times of high unemployment and during event related responsibilities.
I am heartened by the President’s willingness to engage in a debate about taxes and the proposed programs after the first program of $1.9 trillion has already been enacted. Most participants in the financial markets would not want to see any of these proposals diminish the sound momentum that is building in the economy. Private employment will not continue to recover without improving confidence in the business community at large. Keeping rates low is helpful for now. I just would not want to see any diminution in risk taking in the near term.
John Hallacy
John Hallacy Consulting LLC
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