Biden spending spree to unleash inflation, big-money managers worry

Fed taper tantrum, higher taxes also 'tail risks'

Big-money managers worry President Biden’s ambitious spending plans could derail the momentum seen in markets and the economy, according to a new Bank of America survey. 

Risks are "now associated with boom not recession," wrote Michael Hartnett, chief investment strategist at Bank of America, noting that COVID-19 was named a global pandemic on Mar. 11 of last year. 

U.S. equity markets climbed to record highs in April with the S&P 500 extending its rally off the March 2020 lows to 84% while the rollout of multiple COVID-19 vaccines has bolstered the reopening of the economy. 

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The economy is expected to have in the second quarter grown 4.9% quarter over quarter, the fastest since the third quarter of 2020, according to FactSet, while at the same time the unemployment rate fell to 6%, the lowest since the onset of the pandemic.

The pickup in economic activity, which has occurred following an unprecedented amount of fiscal and monetary stimulus, has big-money investors worried about the impact of those policies.

A net 74% of respondents to Bank of America’s Global Fund Manager survey said a bond market taper tantrum (32%), inflation (27%) or higher taxes (15%) pose the biggest "tail risk" to markets. 

The Charlotte, North Carolina-based lender surveyed 117 participants with $553 billion in assets under management between April 6 and April 12. 

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Biden is currently backing a $2.3 trillion infrastructure bill and is also reportedly working on a $1 trillion package that centers on health care and education. He plans to at least partially pay for the latter two plans by implementing a series of tax hikes. The president last month signed the $1.9 trillion American Jobs Plan. 

Investors worry that what would amount to more than $5 trillion of spending could bring back inflation that has been missing since the 2008 financial crisis. 

Price increases have already begun to catch the attention of Wall Street. Quickening inflation could cause the Fed to slow, or taper, the pace of its asset purchases which would likely put a damper on the economic recovery. 

Consumer prices rose 0.6% month over month in March, making for the biggest monthly increase since August 2012, according to a report released Tuesday by the Labor Department. Prices were up 2.6% annually. That report followed last week’s update which showed producer prices rose 4.2% annually, the fastest pace since September 2011. 

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The Biden administration said following the report that it expected "measured inflation to increase somewhat," mostly due to three different temporary factors including base effects, supply chain disruptions, and pent-up demand caused by the pandemic.

However, they see the price increases as being "transitory" with transitory with their impact fading as the economy continues to recover from the pandemic.