Faster Taper? — Centrists and Progressive Agree on Taxing the Very Rich

This is a data heavy week. The biggest days will be Thursday with the GDP (I am below consensus) and Friday with personal income, spending, PCE and ECI (wages, adjusted for compositional changes in the workforce; I agree with the consensus).

I don’t think the negative data surprises I expect will make a difference for the Fed.  Last week, Clarida’s and Weller’s speeches as well as Powell’s comments on Friday, confirmed the hawkishness conveyed through the minutes. How will that stronger hawkishness manifest itself?  With the taper a done deal next week, I think Powell could start floating the idea that the taper pace could be accelerated, if inflation gets too hot.

This is not a new idea.  At the September Meeting, Powell was asked if there was a risk that the Fed could be compelled to hike before the conclusion of the taper. Powell indicated that the Fed was more likely to accelerate the taper. I expect the issue to be raised again at the November 3^rd meeting and I expect a similar answer from Powell, and this time round I expect the market to take notice. 

The other big theme for the week is fiscal.  Over the weekend we got the contours of a deal between centrist and progressive democrats on the BBB bill (reconciliation, social and environmental) that will unlock the House progressive votes needed to pass the BIF (bipartisan, infrastructure) already voted by the Senate. 

There was no mention of the overall envelope which suggests it could be below the $1.75tn to $2tn announced by the White House and closer to the $1.5tn Senator Manchin had agreed with Senate Majority Leader Schumer in July. On funding, because of the opposition of centrist Senator Sinema to higher tax rates on corporations, capital gains and individuals, we could instead have a tax on unrealized capital gains of the very wealthy, those owning above $1bn in assets or having income above $100mn for 3 years in a row, fewer than 1000 taxpayers.

This form of taxation turns out to be close to the wealth tax advocated by Senator Warren and she and Senator Sinema are reported to be working together on finalizing the numbers.

In addition, House Speaker Pelosi indicated on Sunday that she was open to raising the debt ceiling through reconciliation.  This would avoid a repeat of this month’s brinkmanship when the current debt ceiling suspension expires in early December.

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

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