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Morning Notes — Next


October 21, 2021

Headlines out of Washington over the past ~12 hours suggest the risk of tax hikes can nearly be eliminated from the list of concerns facing equity investors.  However, there’s still too much uncertainty surrounding Democrat spending plans and markets always price a discount into uncertain event outcomes. Investors have been so focused on the threat from higher tax rates, they may be missing the risk of a smaller fiscal spending bill without associated tax hikes. That outcome could further exacerbate inflation pressures that are just starting to creep into the narrative. We expect inflation to decelerate but remain elevated. Core inflation that settles into the low-mid 2% range would be ideal, but it’s entirely possible we end up with something higher.  The administration has been clear it wants to promote maximum employment, but its decision on Fed Chair is still unknown.  There’s also been a vacancy at the Fed all year with at least one Vice Chair position to fill next year. If the Chair and other Fed vacancies share the administration’s goal, the likelihood for the Fed to fall behind the inflation curve only rises.  For the record, it’s very difficult to ‘soft land’ an economy. If inflation doesn’t decelerate sometime in mid-22, we could be in for a bumpy ’23.

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