The Fed Tees Up a Rate Hike

Fed Says Interest Rate Hikes Coming Soon

The Federal Reserve on Wednesday signaled that it is ready to start raising interest rates for the first time since the central bank cut rates to near zero as the Covid-19 pandemic began in March of 2020.

Reiterating the Fed’s dual mandate of maintaining maximum employment and an inflation rate near 2% over the long run, the Federal Open Market Committee said in a statement that it will keep the federal funds rate at between 0% and 0.25% for now. However, with “inflation well above 2 percent and a strong labor market, the committee expects it will soon be appropriate to raise the target range for the federal funds rate,” the committee added.

At a virtual press conference, Federal Reserve Chair Jerome Powell said the “committee is of a mind to raise the Fed funds rate at the March meeting,” as long as conditions continue to warrant doing so. At the same time, both Powell and the committee emphasized that the central bank will continue to monitor conditions and adjust its policy path as needed.

The Fed also said that it intends to continue to reduce its asset purchases, ending the program that has provided extra liquidity for the markets in early March, as expected.

A more hawkish approach to inflation: Some critics say the Fed has been too slow in responding to an inflation rate that hit 7% last year, the highest level in decades. The hesitancy reflects in part the Fed’s interest in allowing the labor market, which is still millions of jobs shy of its pre-pandemic peak, time to gather strength.

On Wednesday, Powell said that the labor market is showing encouraging signs and should be able to withstand an interest rate increase. “I think there’s quite a bit of room to raise interest rates without threatening the labor market,” Powell said. “This is by many measures a historically tight labor market.”

Diane Swonk, chief economist at Grant Thornton, told The Washington Post that the Fed has changed its approach to inflation in a hurry. “The biggest issue is that the Fed moved in nearly a record amount of time from being patient, to being panicked, on inflation,” she said. “They want to turn the heat down a bit on the economy but not let the flame go out,” she added. “And that sounds good in theory, but in reality, it’s much harder to do, especially in a world where literally everything can change in the blink of an eye.”

House Progressives Call for Billions More in Pandemic Preparedness Funding

House progressives on Wednesday urged President Biden to boost funding for pandemic preparedness and global vaccination efforts, calling on him to take a number of additional steps to address what they called “critical opportunities that we must seize as a country to crush the pandemic worldwide.”

In a letter to the president, the Congressional Progressive Caucus led by Rep. Pramila Jayapal (D-WA) urged Biden to “redouble” efforts to pass the Build Back Better Act and increase pandemic preparedness funding in the bill from $1.3 billion to $8 billion, including $2 billion dedicated to global vaccine manufacturing.

“Given the renewed urgency for forceful legislative action with the rise of the Omicron variant, the passage of the Build Back Better Act is more essential than ever,” Jayapal and 29 other Democrats wrote. “We ask for your support for this funding increase as you engage in negotiations with the Senate and House to enact the legislation.”

The group also called for additional fiscal year 2022 appropriations to help the global fight against Covid-19, citing expert estimates that $17 billion is needed to speed vaccine distribution with a goal of reaching 70% vaccine coverage worldwide by mid-year. In addition, the lawmakers urged the White House to step up diplomatic efforts to share vaccine technology and intellectual property globally, saying that only 7.1% of people in low-income countries have received at least one dose of vaccine.

“As new data emerges about the quickly spreading Omicron variant, we know that the longer the global pandemic is allowed to run rampant, new, more virulent variants will continue to threaten health and economic wellbeing across the planet,” the letter said. “The harm to U.S. public health and the economy if vaccine-resistant variants are allowed to evolve are almost unfathomable.”

The letter also called for the White House to scale up production of mRNA vaccines by billions of doses a year, maintaining government ownership of any increased domestic manufacturing facilities “to ensure new capacity serves public interests and does not amount to government subsidy to Moderna and Pfizer.”

The bottom line: “The caucus’s letter follows other calls for the Biden administration to adopt a more ambitious approach to helping low-income nations navigate the pandemic,” The Washington Post’s Dan Diamond notes. “The White House has said that its global vaccination strategy is working, with officials Wednesday touting that the United States has donated more than 400 million doses abroad, far more than any other country.”

What’s next: Lawmakers will be looking to increase pandemic preparedness and relief funding as they hammer out an annual spending deal, but the Build Back Better bill remains stalled.

Poll of the Day: Support for Build Back Better

As Democrats attempt to revise the Build Back Better bill that has stalled in Congress, a new poll may give them some ideas on how to proceed.

According to a Politico-Harvard survey of 1,004 people, conducted from January 4 to 9, most Americans don’t know much about the bill, and less than one in four think that the overall package will help their family. Respondents also said they were concerned the bill could create more inflation.

More positively, respondents expressed support for specific parts of the bill. Fifty-nine percent said that the plan to provide universal pre-K would help the country; 53% said the same about the plan to provide four weeks of paid leave for all workers; and nearly half approved of the proposal to empower the government to negotiate lower drug prices.

“The public is saying they aren’t familiar with the Build Back Better bill and are not supportive of it as it stands,” Robert Blendon of the Harvard T.H. Chan School of Public Health, who designed the survey, told Politico. “But if you rebrand the Build Better Better plan and it only has a few things the public thinks are very important, they could reconsider and might love it.” 

No Increase in the SALT Deduction, Senate Dems Say

It looks like a major increase in the cap on the state and local tax deduction won’t be included in the Build Back Better bill that Democrats are reworking in the Senate.

The version of the bill passed by the House last year raises the current $10,000 cap to $80,000 through 2030, thereby providing a substantial windfall to many high-income residents in high-tax, high-property value states. Some lawmakers from blue states, including Senate Majority Leader Chuck Schumer (D-NY), have said that the cap hike is a top priority, and a group of Democratic representatives from New Jersey and New York recently reiterated their threat to scuttle any bill that fails to include an increase.

But Senate insiders are signaling that the increase is too big to include in the revised bill, which has to pass muster with Sen. Joe Manchin (D-WV), who reportedly does not support the proposed tax change.

“Yeah, I think that’s dead,” one unnamed Democratic senator told The Hill.

Howard Gleckman of the Urban-Brookings Tax Policy Center said that the SALT deduction increase, which would cost an estimated $275 billion over five years, would have trouble fitting in a smaller version of the Build Back Better bill. “The smaller the bill gets, the harder it is to squeeze something in,” Gleckman said. “If they do put something in with SALT, it’s likely to be much smaller than what they were talking about before.”