President Biden hopes he set up a strong conceptual frame this week for 2022, economically and politically. The administration clearly is banking on sustained constructive economic fundamentals reversing horrific sentiment in place since the onset of last summer. While limiting remarks to current challenges he said were already improving, the speech picked up a theme stressed Monday in his Federal Reserve Board leadership announcement: federal policy can and does help Americans get through the economic effects of this pandemic.
The Federal Reserve and Department of Treasury understandably share a storied history of cooperation, coordination at times, and conflict less frequently. Another chapter in this linkage will be featured next week at a November 30 Senate Banking Committee hearing at which Secretary Janet Yellen and Chair Jerome Powell will discuss pandemic relief oversight and “building a resilient economy.” Senate Banking Chairman Sherrod Brown also announced the committee will hold separate nomination hearings for Powell and Governor Lael Brainard next month or possibly January. The timing is challenging given the Board’s December 4-16 blackout period surrounding the FOMC’s December 13-14 meeting.
Brainard is set to become overall vice chair (rather than as we expected vice chair of supervision), strengthening the triumvirate that’s worked so well together the past five years—this time with more responsibility. Yes, they are so close that we’ll term them Team PB&J (using Secretary Yellen’s first name). This formidable trio had much to do with the March 2020 to present melding of fiscal and monetary policy (long sought by Powell, Yellen, and Ben Bernanke before them).
Should the US be on the cusp of sustained growth next year a high-water mark of fiscal expansion will end with the calendar year. Tighter monetary policy in this scenario would also allow normalization of Washington’s extraordinary macroeconomic policy, a very welcome development. Emergency outlays of the past seven quarters, including $5.1 trillion already added to debt by this and the previous administration, and potentially $2 – $2.5 trillion fully offset new infrastructure money and social programs will hopefully stimulate growth. If so, it could signal the worst of Covid-19’s effects on the US economy have passed.
Regarding paid-for spending, the Joint Committee on Taxation yesterday announced staff discovered an error in the calculation of the average tax rate for calendar year 2022 for taxpayers with incomes more than $500,000. The revised estimate shows Americans making more than $1 million would pay 3.2 percentage points more taxes in 2022— and even more in subsequent years. The prior estimates stated tax burden would drop 1.7 percentage points. If it holds, the recalculation should ease a few lingering concerns among Democrats that they are providing a tax break to the rich and help ease enactment of Biden’s Build Back Better program.
The president and his team know history portends losses for his party next November. He, his staff, and congressional Democrats also know August/September sentiment could cause a repeat of midterm 2010 when President Obama suffered the turnover of 60 House and eight Senate seats to a GOP tsunami predicated on, but not constrained to, voters’ economic mood. Recent gubernatorial races in New Jersey and Virginia resonate sharply within congressional Democrats’ ranks. This week and next month might provide a path away from political worst case outcomes next year yielding losses closer to historical averages since 1990 of -26 in the House and -2 in the Senate. Of course, they hope to buck history.
