Part I: Financial Speculations on the Fed, Stimulus, and in Part II – the pricing-in of Post-Election Markets

(11/6/2020)

Friday

Financial Doing, Boulder, CO – Robert Winer, M.D.

↓ = less, decreasing

↑= more, increasing

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Fed supportive monetary policy 

It has remained status quo and the Fed still calls for Congressional stimulus ASAP.  This week Fed’s policy-setting committee didn’t change its tune. The relevant current policies are:

1 keeping overnight interest rates about zero% with change based on thresholds metrics that show: 

a] tight labor markets to the point where factories and service can't get employees that they easily could accommodate into their workforce 

b] inflation => 2%. 

2 keeping their weekly purchase of Treasurys and mortgage-backed securities at their current duration average of about 6 years.

Election update and its possible economic consequences.

1 Fiscal Policy: Stimulus in Congress

77 year-old Senate Majority Leader Mitch McConnell, re-elected in Nov. 2020 for a new 6 year term gave a “should” shout-out: Congress should pass a relief package this year. He’ll negotiate it behind closed doors with returning House Majority Leader – Speaker Nancy Pelosi.

It’s likely that McConnell will get unanimous support from his own Senate caucus members. A symbolically pertinent enough ↓’d amount stimulus package will be passed. It will be a small amount higher than what the Republicans were will to give before election but significantly below what the Democrats wanted. Nevertheless to keep people happy, there will be another round of stimulus checks to households.

The political cost to Democrats will be such that they won’t go to the mat to wait for the Jan 2021 Georgia Senate runoffs which possibly could help them regain a Senate majority, but if it does go to a runoff, it could push Republicans’ to a $↑from where they are now. 

2 Monetary Policy: Fed future action

The Fed hasn’t but could pledge to keep buying bonds until certain criteria are met. This is its policy for short-term near-zero rate markets..

The Fed hasn’t but could pledge to change its bond portfolio duration by purchasing longer-duration securities. The disadvantage would be that it could keep long-term interest rates ↓for longer period and prevent inflation targets from being met.