The Dollar And The Fed

One of the stark developments since the initial shock of the pandemic has been the aggressiveness of the US monetary and fiscal response. This was also true in dealing with the Great Financial Crisis. The divergence then and now has shaped the investment climate.

On a per-capita basis, the pandemic struck the US harder than in most other high-income countries, and some see the wide disparity of income and wealth as a contributing factor. In any event, the vaccine rollout has been quite good by international standards. This, coupled with vigorous policy support, has caused economic activity to explode.

A growing chorus of economists has argued that the Fed ought to target nominal GDP. Inflation, which the Fed targets at 2% (now on an average basis, but no term for the average has been declared), and 3% real growth have served as an elusive but desired goal.

In nominal terms, the US economy grew by more than 10% annualized in Q1, and it appears well above that here in Q2. In fact, after the disappointing employment report, the Atlanta Fed's GDP tracker sees Q2 real GDP at 11% annualized, down from 13.6% prior to the employment report. The NY Fed's tracker slipped to 5.1% last week from 5.3%.

Many high-income countries contracted in Q1 but are recovering, and positive growth is likely going forward. The acceleration of the US economy is still quicker, meaning that the divergence may extend a bit longer. However, the real takeaway from recent news and developments is that the divergence meme is ending.

In fact, models of data surprises show that the US is faltering and Europe is improving, and this can only be underscored by the nonfarm payroll report. In addition, the vaccine rollout in other high-income countries is accelerating, and Europe's seven-day average has surpassed the US. Partly, this is a function of catching up after a slow start. However, there is another issue that is unfolding. A significant minority appear reluctant to take the vaccine. 

The greater the contagion, the greater the percentage of people needed to have immunity. It is possible that some areas, and even states, may fall shy of the coverage that doctors and scientists say is required to achieve herd immunity. In the US, the vaccines are still regarded as for emergency purposes only, making it difficult for public authorities to force the issue.

Making the vaccines not just for emergencies could make it easier to impose greater social ostracization on those who refuse a vaccine. While the modern libertarian spirit may be the force behind attempts to decentralize finance, the public health crisis seems to push in the opposite direction.

1 2 3 4
View single page >> |

Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

more
How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.