The More Things Change

by Kevin Karpuk

Many people will remember 2020 as a time of constant change. Varying and inconsistent health directives, a changing employment landscape, and volatility in financial markets were the norm. And, yes, 2020 was an election year. The battle that raged for control of Washington was one of the most bitter in memory, and the partisan divide in the country ran deep.

Now that the election is behind us – with the exception of the Georgia Senate runoffs and a concession in the presidential race – one has to wonder what comes next.

The much-ballyhooed “Blue Wave” did not come to pass. The Democrats not only did not take control of the Senate, but their hold on the House of Representatives became tenuous. The idea of sweeping changes to tax law and a Green New Deal will likely shift to more measured attempts to make changes at the margin.

As my colleague, Chris Lakatosh wrote in a prior issue of this magazine; presidents get allocated more credit or blame than they deserve. While the executive has direct responsibility for foreign affairs and has a hand in the budget process, the economic wellbeing of the average citizen is more influenced by monetary and fiscal policy, both of which are largely outside of the presidential portfolio. 

The new split of control in Washington will have an impact on what we believe to be a significant change coming: the switch of primacy from monetary to fiscal policy supporting the economy. For the past 12 years, the Federal Reserve has been ready to put a finger in the dyke when financial markets or the real economy stuttered. The Fed cut interest rates and provided rounds of quantitative easing to smooth out the rough patches, but recently, Chairman Powell has signaled that this monetary support needs to be bolstered by fiscal relief, which only Congress can supply. The Fed does not want to cut rates further and is seeing a decrease in the effectiveness of their asset purchases. They are saying that they can no longer act alone during times of stress.

Whereas monetary policy is designed by a small handful of financial experts who can act quickly, fiscal policy is a political game, played by partisans who have agendas and reelection desires. It requires bargaining and compromise to be achieved, especially when voting control is this divided. It can be slow and ugly. If the Federal Reserve acts with a scalpel, Congress acts with a bludgeon. When it does push through fiscal stimulus quickly, it often has unintended consequences in the future. 

Investors have taken to peering beyond the pandemic and have pushed the stock market higher, but many economists fear that the real economy’s footing is tenuous. Many feel that there is a need for more stimulus from the government. For the past couple of months, we have seen this arm-wrestling take center stage as both sides spar with hundreds of billions of dollars at stake.

You will need to get used to this slower pace of policy adjustment. This president-elect will not have as effective a Federal Reserve at his back as his predecessors enjoyed. When the next economic hiccup comes, it will be up to Congress to help Main Street avoid a recession. It will require deal-making across the aisle.

Bipartisanship has not been in vogue recently and did not need to be. That must change in the future if we are to see more even economic growth across the nation. The good news is that as humans, we are hard-wired to do as my high school wrestling coach used to emphasize – we “adapt, adjust, and improvise.” Hopefully, our elected officials can adapt to the new set of rules they face and can help guide the economy forward.

Securities offered through M Holdings Securities, Inc., a Registered Broker/Dealer, Member FINRA/SIPC. Investment Advisory Services offered through Cornerstone Advisors Asset Management, LLC, which is independently owned and operated.

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