- Fed Chair Powell has another chance to plead with Congress for more stimulus
- U.S. ISM manufacturing index expected to fall back from 2-1/4 year high
Fed Chair Powell has another chance to plead with Congress for more stimulus — Fed Chair Powell and Treasury Secretary Mnuchin today will appear before the Senate Banking Committee for their quarterly briefing on the implementation of the CARES pandemic aid legislation.
The Fed and the Treasury yesterday announced the official extension until March 31, 2021 of four of the Fed’s nine pandemic aid programs. Those four extended programs are the Commercial Paper Funding Facility, Primary Dealer Credit Facility, Money Market Mutual Fund Liquidity Facility, and PPP Liquidity Facility.
Treasury Secretary Mnuchin today will likely get some heat from Democratic Senators for his decision to close down the other five pandemic aid packages against the Fed’s will. The pandemic is at record highs, and the Fed wanted to keep all of its options open. However, the Treasury had the legal authority to close down the programs regardless of the Fed’s opinion.
Treasury Secretary Mnuchin also mandated that the Fed return unused aid money from the programs so that Congress could re-appropriate the money for other aid. If Congress can’t come to any agreement on that aid, however, then the cash will languish unused in the Treasury’s general account.
The five pandemic aid programs that Mr. Mnuchin shut down are the primary and secondary credit market facilities, Municipal Liquidity Facility, Main Street Lending Program, and Term Asset-Back Securities Loan Facility.
Fed Chair Powell will get another opportunity today to plead with Congress for more stimulus aid. However, his pleas will likely fall on deaf ears again since Republican and Democratic leaders seem hopelessly deadlocked. Treasury Secretary Mnuchin recently said that he was trying to get talks restarted. However, there has been no indication that Speaker Pelosi or Senate Majority Leader McConnell plan to budge from their respective positions of $2.4 trillion versus $500 billion.
Mr. McConnell has no real political pressure to give any concessions to Ms. Pelosi. Meanwhile, Ms. Pelosi has an incentive to wait to see if Democratic candidates can win both the Georgia Senate seats in the Jan 5 run-off elections, which would give Democrats control of the Senate. Ms. Pelosi also seems to be waiting for President-Elect Biden to become president on January 20. At that point, the Biden administration may take over negotiations with Mr. McConnell, if he is still the Majority Leader.
The betting odds at PredictIt.org, for whatever they are worth, are little changed at only 28% for the Democrats to take control of the Senate at the Jan 5 Georgia run-offs. However, that means there is still a 28% chance that Democrats might take control of Washington, allowing them to proceed with blue-wave legislation such as higher taxes and a big stimulus bill.
The seat count in the Senate will change this week after Mark Kelly is sworn in as the new Senator from Arizona, which is expected to happen at noon on Wednesday. After Mr. Kelly is sworn in, the new seat count in the Senate will be 52 seats for the Republicans and 48 seats for the Democrats. Meanwhile, Mr. McConnell plans to hold a vote this week to confirm Christopher Waller as a new Fed Governor. He is currently the research director at the St. Louis Fed. However, Mr. McConnell still does not appear to have enough votes to push through the controversial nomination of Judy Shelton as a Fed Governor. Republican Senators Mit Romney, Susan Collins, and Lamar Alexander oppose Ms. Shelton’s confirmation.
Mr. Powell today may be asked about the Fed’s plans for its QE program. The minutes from the FOMC’s last meeting indicated that the FOMC members actively discussed providing more detailed guidance for their $120 billion per month QE program. The markets are hoping that the Fed might shift some of its purchases to the longer-end of the yield curve in an attempt to keep long-term Treasury yields from rising very far when the economy starts to normalize in 2021 as vaccines become widely available.
The market is still not expecting the Fed to raise interest rates for at least the next two years. The Eurodollar futures market indicates that the market is not fully discounting a 25 bp rate hike until mid-2023. The market is currently expecting the Fed to raise the funds rate by a total of about 150 bp during 2023-29, leaving the funds rate target near 1.50% by 2028-29.
U.S. ISM manufacturing index expected to fall back from 2-1/4 year high — The consensus is for today’s Nov ISM manufacturing index to show a -1.3 point decline to 58.0, reversing part of October’s +3.9 rise to a 2-1/4 year high of 59.3. The ISM index is expected to fall back due to business caution as the pandemic hit new record highs in November and forced more pandemic restrictions in many states. The good news, however, is that states are not shutting down manufacturing businesses as they did last spring.
U.S. manufacturing confidence remains in generally good shape with October’s 2-1/4 year high. U.S. manufacturers are looking ahead to early 2021 when the wide availability of vaccines is expected to help the U.S. economy to start to return to normal.
The U.S. markets are also encouraged by the solid economic recovery in China, which is boosting demand for U.S. products. China’s national Nov manufacturing PMI index on Sunday rose by +0.7 to a 3-year high of 52.1, which is well above pre-pandemic level of 50.2 seen in December 2019.
