WE’VE WRITTEN SINCE WINTER that the Federal Reserve might have to speed up the timetable for tapering its $120 billion in monthly asset purchases — but we didn’t think the issue would be on the table as early as this spring. Now it is, as a clear inflation threat changes the narrative.
YESTERDAY’S FOMC MINUTES, plus statements from Fed officials, indicate that the central bankers want to discuss the issue. At the least, it will be a prominent topic at the late August Fed conference in Jackson Hole, and it probably will be discussed at the June 15-16 FOMC meeting and the July 27-28 session.
THE ISSUE IS WHETHER RECENT INFLATION DATA are reliable — are they the beginning of a trend, as the economy quickly bounces back from the pandemic? The threat isn’t necessarily commodity prices, which can be transitory; it’s the serious labor shortage, which could drive wage pressures much higher.
A DUD FOR THE MARKETS: Interestingly, there wasn’t a big sell-off in equities or a significant rise in yields following news yesterday that the Fed soon may debate tapering. There had been persistent warnings that the markets would freak out at even a hint of this development, but markets barely reacted — at least not yesterday.
BOTTOM LINE: With economic data subject to wild swings as the pandemic ends, it’s unlikely that the Fed will actually begin tapering until this winter — and then only if the labor shortage and wage pressures persist. When the Fed does begin to taper, it will be very gradual.
AN INTEREST RATE HIKE STILL SEEMS TO BE well over a year away, perhaps not coming until late 2022. The bond market gets this; interest rates should stay at historically low levels until the data can be trusted and the economy has stabilized. But the Fed has issued its first warning: monetary policy cannot stay this accommodative for ever.
PROGRESSIVES VS. JOE BIDEN: The Democrats’ activist left is pressuring President Biden on several fronts — progressives don’t want to compromise on a massive infrastructure bill and tax hikes, they’re reviving calls to pack the Supreme Court, and — in recent days — they have pushed Biden toward a more aggressive stance against Israel. Biden seemingly has complied.
A CHILL IN THE AIR: Biden has stepped up his calls for a cease-fire, and he no longer is defending Israel’s massive air strikes. This comes as the progressive left — led by Bernie Sanders and Alexandria Ocasio-Cortez — is calling for a halt in U.S. military sales to Israel.
A CEASE-FIRE IS LIKELY WITHIN A FEW DAYS, as Hamas leaders and their tunnels in Gaza are eliminated. But the fallout will persist — if Israel strikes Hamas again later this year, will Benjamin Netanyahu get support from the U.S.? What Washington really wants is regime change in Israel and Hamas — anything to re-set the narrative.
A DECIDEDLY COOL RELATIONSHIP BETWEEN ISRAEL AND THE U.S. will become a major political issue, with Republicans overwhelmingly supporting Netanyahu as the 2022 elections approach. Biden faces a significant rift between progressives and the center in his own party — the first of many fissures, we suspect, that will pull him leftward.
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