Economic Commentary

Economic Commentary

December 21, 2021

Growth scare Grinch – U.S. economic concerns about omicron, Build Back Better, and Fed are overblown

Executive summary

We believe U.S. economic growth fears from the combination of rising infections due to the omicron variant, the Build Back Better plan appearing to be scuttled, and restrictive monetary policy by the Federal Reserve (Fed) are overblown. While these three issues have the potential to hamper growth (collectively or individually), it's far from the certainty many investors are projecting. We expect the U.S. response will be similar to the delta surge this past summer and don’t expect lockdowns in any U.S. states, though there may be some localized restrictions in select cities. Ultimately, the U.S. economic impact from all three issues will likely be minimal.

The implications of the omicron variant globally, though, are more nuanced. The impact will be most acute in those countries re-imposing full or partial lockdowns, including a sizable portion of Europe. Indeed, it clouds the global outlook around the edges. Yet, it also will have limited impact on overall global growth in 2022.

What happened 

The omicron variant is rapidly cycling around the world. Surging new infections have prompted European governments to reimpose restrictions. The Netherlands has reinstated a strict nationwide lockdown until at least January 14. Similarly, Ireland announced an 8 pm curfew for bars and restaurants, and set limits on large gatherings. France and Germany announced travel restrictions for passengers from the United Kingdom. France has also clamped down on holiday events and large gatherings. Canada has paused indoor group events and sports. Israel is once again banning traveling to and from the U.S. or Canada. But, the U.S. response has been limited

“Aside from the omicron variant, the concerns about the Build Back Better plan and Fed choking off growth amount to conjecture. Ultimately, the U.S. economic impact from all three issues will likely be minimal.”

The negotiations to pass the Build Back Better plan have stalled. The $1.9 trillion spending plan was dealt a blow when W.V. Senator Joe Manchin, a Democrat, said he wouldn’t support it in its current form. With a razor-thin majority in the senate, the loss of support by just one senator can scuttle the ambitious spending plan. The plan has been seen by some investors as a key growth driver for 2022.

Last week, the Fed’s Open Market Committee (FOMC) accelerated the pace of tapering its monthly bond purchases. The Fed doubled the tapering pace from a $15 billion to $30 billion reduction in asset purchases per month ($20 billion U.S. Treasuries and $10 billion mortgage-backed securities). The faster pace would have monthly bond purchases concluding in March 2022.

Also, the median expectation among Fed board members now expects three rate hikes in 2022, three rate hikes in 2023, and two rate hikes in 2024. The more aggressive projected timeline came in response to stronger near-term inflationary pressures as a result of supply-chain bottlenecks and the ongoing reopening of the U.S. economy. That said, these are projections and actual policy changes have varied dramatically from them in the past

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