I began the week in a decidedly grouchy mood. My tone would have had a pre-reformed Ebenezer Scrooge thinking me too much the curmudgeon. However, today, seemingly overnight, I have been transformed into a jolly soul.

My cheerfulness started with sane comments regarding interest rates and the economy. While a guest on CNBC, Mizuho Securities chief economist, Steve Ricchiuto, presented a logical and lucid outlook for the U.S. economy. Mr. Ricchiuto forecast stronger growth in what could be a better fiscal/regulatory environment, stating that the economy could experience several quarters in which GDP growth printed over 3.00%, but cautioned that GDP growth would likely average somewhat below 3.0% on an annual basis. 

These sentiments were later echoed by Mark Zandi, chief economist at Moody’s Analytics (which produces the Employment Change Report for ADP) and one of the more bullish economists on the Street for the past several year. He argued that it would be difficult for fiscal policies to add a full percentage point to annual GDP, at least in the near term. In his opinion, pro-growth fiscal policies would likely and 0.1% to 0.2% to annual GDP over the course of a decade. Of course this would assume that a recession does not materialize during that period. I consider this another lucid outlook.

In a Bloomberg article Mohamed El Erian cautioned:

Frustrated citizens are urging the political system to make changes. And politicians who respond by signaling their intention to implement pro-growth measures -- as President-elect Trump has done in the very early days after his victory -- will be rewarded first with better financial market sentiment and, if sound design and proper implementation follow, by an increased flow of corporate cash into investments on plant, equipment and people. But should the policy effort falter or prove insufficiently serious, or should it fail to materialize altogether, the private sector would likely retrench, raising the risk that low growth yields to recession, as artificial financial stability gives way to unsettling volatility.

I consider it a good thing when citizens and businesses (aka “the market”) hold politicians’ feet to the proverbial fire. However, since policies rarely have precisely the intended results, investors must remain vigilant.

The main source of my cheerfulness came from Mr. Trump’s choice for Treasury secretary, Steve Mnuchin. Mr. Mnuchin is, for lack of a better term, a bond guy. He oversaw mortgage trading at Goldman Sachs and spent time in the municipal bond market. When asked about interest rates, Mr. Mnuchin told CNBC hosts:

“Interest rates are going to stay relatively low for the next couple of years.”

This too is a sane outlook. Beyond two years, the economy could be transitioning to the next cycle. It might be heading into a recession. It might be coming out of a recession, by that time. Two years is a pretty long time horizon for interest rate projections, but it is not as addlepated as making a five year call on the 10-year yield, as some popular fixed income figures have done. I suspect these aggressive calls for 6.00% 10-year UST yields in five years have more to do with book talking (with some political bias thrown in) than a true belief that the 10-year will be yielding 6.00% in 2021. FYI: The last time the yield of the 10-year UST note was over 6.00% was July 2000.

Mr. Mnuchin may have good reason for trying to keep long-term UST yields relatively low in the coming years. This morning, he intimated that the Treasury could extend the duration of the government debt, essentially locking in financing for a long time. How long? When asked whether the Treasury would consider 50 or 100 year bonds, Mr. Mnuchin responded:

“We’ll take a look at everything.”

This would mean, not angering the bond vigilantes. Since bond vigilantes loathe inflation and the policies that cause inflation, the Trump administration may have to surgically implement stimulus plans, rather than going on an infrastructure spending spree. I would expect the new administration to focus more on tax and regulatory policy and less on infrastructure spending too boost U.S. economic activity.

When asked about tax policy, Mr. Mnuchin stated that lower tax rates would be accompanied by fewer deductions for taxpayers in the highest tax bracket. Thus, tax-advantaged investments, such as municipal bonds might not be quite dead. Mr. Mnuchin would not comment much regarding the future status of Fed Chair Yellen, but gave no indication the Trump administration would try to convince Ms. Yellen to leave before her term, expires, at the end of January 2018. Mr. Mnuchin reminded viewers that there are two Fed openings which need to be filled in the coming year.

I expect the Fed to remain independent following Mr. Trump’s inauguration and I do not foresee Janet Yellen retiring as Fed chair prior to the end of her term. However, I believe we could see a more vigilant and pre-emptive Fed in 2017. In the past two days, one Fed official after another,(from Fed Chair Yellen to Vice Chair Fischer toFed governor, Jerome Powell and Dallas Fed president, Robert Kaplan)have warned against tightening to slowly. 

There are several equity strategists out with bullish market calls based on immediate robust fiscal stimulus and a continually dovish Fed. For one, it takes time (months) for fiscal policies to be implemented and even longer for their effects to be felt in the economy. With 2017 likely Ms. Yellen’s last year as Fed chair, she might feel incentivized to quicken the pace of monetary policy renormalization before she leaves and stronger inflation pressures take hold. 

I believe the story for 2017 will be one of higher interest rates, but investors and market participants might be surprised at just how low next year’s higher rates are and that the yield curve is not as steep as many pundits forecast.