“Monolithic” central bankers still see slack in the labor market and no signs of inflation.
Don't believe all the chatter about divisions within the Federal Reserve Board, because it is more “monolithic and unified than most people realize,” according to Gregory Valliere, chief political strategist at the Potomac Research Group.
During his keynote address at the Investment Management Consultants Association Advanced Wealth Management Conference in San Diego on Monday, Mr. Valliere pegged next summer as the start of a Fed's tightening cycle.
“The hawks are all leaving, and there's only a couple of real hawks left,” he told the audience of financial advisers.
“Right now the key players all think the same, and they think if they make a mistake they would prefer to err on the side of staying on the fence too long,” he added. “The safer bet is still that they wait till next summer, because they still see slack in the labor market and there are no real signs of inflation in the U.S.”
Last Friday, the Labor Department reported that an increase in hiring pushed unemployment to a six-year low of 5.9%. Nonfarm payrolls climbed by 48,000 after a gain of 180,000 in August.
While Mr. Valliere acknowledged that there is no shortage of critics of Fed policy, he emphasized that “the Fed will not be dissuaded, because this is a very, very unified FOMC.” The Federal Open Market Committee is the group of Fed officials who set interest rate policy.
On the matter of tax reform, he said the markets should not expect Congress to touch the tangled mess of individual reform any time soon, but that corporate reform is definitely on the table.
Referencing the recent move by Burger King to purchase Canadian-based Tim Horton's coffee and donut retailer, he quipped, “How broken is our tax code when Canada becomes a tax haven?”
“I think you could see corporate tax reform pass both houses next year, but the White House will want to raise some revenue, while the Republicans will want it to be revenue neutral,” he said. “I'm not persuaded we can get individual reform next year.”
Part of his outlook for tax reform includes a prediction that the Republicans will control both houses of Congress following the midterm elections next month.
Mr. Valliere sees virtually no chance of the Republican Party losing control of the House of Representatives, and he thinks only one Republican seat in the Senate is vulnerable, but identified at least a half dozen Democratic seats that are in trouble.
The Republicans only need to pick up six seats to win control of the Senate.
“The Republicans should do quite well in the midterm elections; you've got a lot of shaky Democrats in states that Mitt Romney won two years ago,” he said. 'If the Republicans control both houses, the marquee issue will be tax reform, and they will try to kill Obamacare, but they will need 67 votes to override a veto.”
While he doesn't believe Congress will get enough votes to override a veto, he does believe there will be bipartisan support to be repeal the controversial medical device tax.
Other issues he expects to pass if the Republican Party controls both houses of Congress are the Keystone pipeline project, expanded free trade, and a move toward energy exports.
On the issue of the next presidential election, he said it is Hillary Clinton's to lose, because the demographics of a presidential election are extremely different from a midterm election.
“Hillary has to know there is a very thin bench on the Democratic side if she doesn't run,” Mr. Valliere said. “Joe Biden is now apologizing for something he's said almost every day.”
