Articles

First Foundation's Economic/Market Update Luncheon Summary

February 19, 2010

Greg Valliere, the Chief Policy Strategist for the Potomac Research Group, gave a generally upbeat assessment of developments in Washington. He believes the Federal Reserve Board will keep the key federal funds rate close to zero for many months to come, perhaps through the end of the year.

Even though the economy is beginning to grow and is clearly out of recession, Mr. Valliere said the central bankers will be in no rush to tighten, because there's no imminent threat of inflation. Most Fed officials focus on unit labor costs as the most accurate barometer of inflation, and wage pressures should be dormant for at least another year.

Another major concern of investors -- an activist political agenda -- has clearly abated, Mr. Valliere said. The Jan. 19 election in Massachusetts sent a clear signal that voters are distrustful of big government programs, and the Democrats now have a valid reason to fear the November elections, which should result in major gains for the GOP.

As a result, the Obama agenda has stalled. Mr. Valliere doubts there will be any action on cap-and-trade, and if there's a face-saving effort to pass a modest health care bill, it probably will focus on reforms in areas such as pre-existing conditions, not a massive new expansion of federal coverage.

While gridlock is usually good for the markets, there's one notable exception, Mr. Valliere said. He believes neither party will come together to take truly tough action to reduce the budget deficit, which probably will exceed $1 trillion annually for the next two or three years. For now, this is having virtually no impact on interest rates, but continued red ink at this level eventually will become a major market concern, he asserted.

A year ago, it appeared that higher taxes were a leading option for dealing with the deficit, but the political landscape has shifted. Mr. Valliere believes there will be no major new business taxes this year, and while the Bush tax cuts may be allowed to end on Jan. 1, 2011 for wealthy Americans, the Bush tax cuts will be extended for the vast majority.

Geopolitics is always a huge wild card for investors, but Mr. Valliere asserted that a blow-up is not imminent over the Iranian nuclear facilities. With Iran's government reeling as protests rock Tehran and other cities, it's unlikely that Israel will attack the nuclear facilities; instead, very tough sanctions will be the next step. A more immediate geopolitical concern, Mr. Valliere said, is the threat that U.S.-China relations could hit a very rough patch.

« Back to Article Index