Wednesday, September 28, 2022

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The dog that didn’t bark

The big news over the weekend was Senator Manchin’s decision to oppose President Biden’s new fiscal package, which was expected to cost roughly $1.75 trillion. The economists at Goldman Sachs responded to this news by reducing their forecast of real economic growth in the first quarter of 2022 from 3% to 2%. Oddly, however, there doesn’t seem to have been any significant change in 10-year Treasury bond yields:

I see a couple of possibilities here:

  1. Perhaps Goldman Sachs is wrong in assuming that fiscal policy has a big impact on growth.
  2. Perhaps slower growth (both real and nominal) has no impact on long-term bond yields.
  3. Perhaps the market believes that Manchin will reconsider, and agree to support a slightly different package.

I am very skeptical of the second possibility, but am open to both the first and third options. Any thoughts?


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