• A new White House, but the issue remains the same – dealing with the COVID-19 pandemic
  • There were positive trends on the virus front in January, including reduction in the number of people hospitalized for COVID in the United States
  • Fed Chair Powell said it was “premature” to even discuss eventual exit plans during the January 27 FOMC press conference, but fixed income markets, still scarred by the 2013 taper tantrum, remain fixated on the timing of the Fed’s unwind plans

The first full month of the Biden administration begins with Covid-19 still at the center of any economic discussion, including vaccine production/distribution and fiscal aid. The surge in cases, hospitalizations, and deaths in late 2020 led to increased restrictions in the United States and abroad, leaving a negative imprint on multiple economic metrics in December. The vaccine distribution effort has been muddled with hiccups at all levels of government, and the White House’s $1.9 trillion stimulus proposal has been met with opposition from even more moderate members of Congress. All of this adds up to a murkier near-term economic outlook, and the tone in financial markets as January progressed could be described as curbed enthusiasm (hat tip to Larry David).

It wasn’t all doom and gloom in January, though. The trajectory of COVID cases and hospitalizations has improved from the November/December peak, as illustrated in Exhibit 1. Moreover, growth rates in hospitalizations have declined in all five regions of the country. Concern over hospital capacity, particularly ICU beds, has been one, if not the most, predominant driver of lockdowns across the country. Therefore, this positive trend over the last few weeks may perhaps brighten the outlook on multiple fronts, or at least offset some of the negatives mentioned above, assuming it continues. California lifted its regional stay-at-home orders on January 25, and New York also eased restrictions in parts of the state last week.

What Now for the Fed?

The short answer would seem to be ‘more of the same’ judging by the tone of the most recent FOMC meeting on January 27. Forward guidance for interest rate policy remains unchanged since the September framework change that looks for sustained above-target (2%) inflation before raising the fed funds rate. Fed Chair Powell took it a step further during the press conference, noting that a near-term rise in inflation gauges as the economy reopens will be viewed as transitory. The official guidance for asset purchases remained unchanged as well, calling for “substantial further progress” on employment and inflation goals before any changes to the current program.

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