Why Fed’s discord is not what the economic recovery needs

China’s current credit deleveraging is also having an impact on the global economy, says senior portfolio manager

Why Fed’s discord is not what the economic recovery needs

While the economy has begun to recover, Avi Hooper, senior portfolio manager of the Invesco, is concerned about what the Federal Reserve Board’s current discord may mean for continued improvements and what China’s current credit deleveraging could also mean.

“It’s come out of left field, and it’s about decision-making in the Federal Reserve and the impact on growth and inflation,” Hooper told Wealth Professional, referring to the new independent probe into the bank’s top officials’ stock trading, which have raised all kinds of ethical uestions.

“When we look at our economic recovery so far – whether it’s in the U.S. or Canada – it’s very clear that the policy decision-making, whether it’s been monetary policy, the policy set out by the US Federal Reserve or Bank or Canada, or fiscal policies, all the ongoing stimulus programs have helped the economy overall recovery, have been very successful. All we need to do is look at the asset price valuations to see how successful they’ve been.

“The role of policy-making on the economic recovery is very important, but we’re starting to have a little concern about the Federal Reserve’s policy-making,” Hooper said, adding this discord among the decision-makers comes on the heels of the politicization of the passing of the U.S.’s $3.5 trillion stimulus package and is accompanied by questions about the Fed Chairman, Jay Powell’s, leadership and whether it will continue next year.

“This came out of left field, so we’re more concerned about the decision-making process within the Federal Reserve, and its implications on the economic outlook, both for growth, as well as with regard to inflation,” he said. “It creates a lot of uncertainty.”

While Canada remains pretty strong with Canadian jobs having returned faster than the U.S.’s – which is still short 5 to 6 million pre-pandemic jobs – Invesco is still bullish on the Canadian dollar, even though the country is facing uncertainties in the U.S. and true demand growth pressure from China, which he expects will continue to reverberate for awhile. China is going through a domestic credit deleveraging cycle, 20 years in the making, so he said, “it’s not going to happen quickly”. But, there’s concern about what impact it will have on goods as China is the world’s second largest economy.

“We’re looking at the impact that China has had over the last 20 years, as it’s grown and grown and grown and been a huge source of demand for all sorts of commodities,” he said. “That withdrawal, or lessening of demand that we’ve seen from China over its growth that has been witnessed over the past few decades, is what is going to be more impactful for the global economy.”