Biden and Fed: here’s what we learned for the economy

Andrew Busch
4 min readApr 29, 2021
Source: WaPo

Both the Fed and Biden had big meetings this week. Biden gave a “this-is-not-a-state-of-the-union” state of the union address on part 2 of his “infrastructure” plans. The Fed had a “we’re-not-tapering-and-inflation-is-temporary” meeting on monetary policy. Let’s quickly dive into both to see if we and the markets learned anything new for the economy.

The Fed met first this week and left policy unchanged. This was not a surprise and had been telegraphed out to every economist, trader and politician ahead of time. What this means is that the outcome was pre-ordained, and no surprises were had. (I’m guessin’ Sen. Cruz would’ve dozed off at this meeting as well and who would blame him.) The Fed maintained targeted interest rates at zero, purchases of US Treasury securities at $80B a month and purchases of MBS at $40B a month.

After the announcement, interest rates didn’t move significantly and there were no major resets of expectations for future rate hikes. But this is misleading as interest rates have moved up prior to the announcement this week. And the US 10yr note yield has risen significantly over the last 8 months from an August low of 0.5% to a March peak of 1.77%. The three drivers of higher interest rate have been massive US government spending ($12.4T), the miracle of vaccines (10 worldwide) and the reopening of the US economy from the shutdowns. All three have driven a surge in economic growth, a rapid drop in unemployment and an increase in inflation.

Source: CNBC

By the Fed staying on hold despite this, the central bank is signaling they will attempt to run the US economy hotter for longer to drive unemployment below pre-pandemic levels to achieve max inclusive employment. Translation: Fed will not react to higher inflation by raising rates until all groups in the US get jobs. Markets should react by keeping short-term rates anchored at zero but driving long-term rates higher to reflect the inflation risk.

What will take us above 2.0% or 2.25% on the 10yr and 4.0% on mortgage rates?

Glad you asked, because you got the answer last night.

Andrew Busch

Andrew B. Busch is the former 1st Chief Market Intelligence Officer for the US government.