The Six Biggest Washington Myths

November 4, 2014

by Justin Kermond

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If you think Washington is hopelessly broken or that the Federal Reserve is bitterly divided between hawks and doves, you’re wrong, according to Greg Valliere. These were two of six common assertions Valliere challenged in a talk last week.

Valliere is the chief political strategist for the Potomac Research Group, a DC-based political consulting firm. He spoke to an audience of 200 at FundForum USA in Boston on October 28. Valliere prefaced his remarks by positioning himself on the 50-yard line, not promoting the left, right or any specific political ideology.

Myth 1: Washington is hopelessly broken

Valliere acknowledged that Washington was broken in 2013 and cited the political debacles of the government shut down and the debt-ceiling crisis. Valliere said that those experiences were unnerving to a Congress with plummeting job approval ratings. So unnerving, in fact, Congress was moved to act differently in 2014 and achieved positive gains in a number of areas.

They passed a two-year budget with a bipartisan effort led by conservative Paul Ryan (R-WI) and liberal Patty Murray (D-WA). Congress reached a deal on the debt ceiling led by Speaker John Boehner (R-OH). They passed a bipartisan farm bill and a VA reform bill. They guaranteed there would be no government shutdown with the new fiscal year starting on October 1. Lastly, Congress and the White House worked together with Boehner to get 159 Republican members of Congress to vote with the president for arming Syrian rebels.

In 2014, Valliere said the economic results were impressive with GDP growing at least 3%, inflation virtually nonexistent, and unemployment and the deficit both falling.  Valliere concluded that while “[t]here are many members of Congress who act like idiots and many federal agencies that are dysfunctional, the facts of 2014 refute that Washington is broken.”

Myth 2: The Federal Reserve is hopelessly divided between hawks and doves

This is the most monolithic and dovish Federal Reserve Valliere has seen in his lifetime. He said this Fed will become even more dovish and unified as the dissenting hawks, who do not favor the policies, leave. Jeremy Stein returns to Harvard and Charles Plosser and Richard Fisher are retiring. This leaves Esther George as the remaining hawk.

One unifying mantra of this Fed, Valliere said, is “that if they err, they err on the side of staying a little too easy for a little too long rather than erring on the side of tightening too soon.” He noted that, with rates this low, if the Fed tightens too soon it is hard to fix. If they wait a little too long, they “can always tap on the brakes to cool off the economy.”

The second mantra Valliere says is that there are more downside risks than upside risks to the economy. Although GDP increased at a rate of 3.5% in the third quarter of 2014, the Fed foresees downside headwinds from Germany, China, an “unhealed” U.S. labor market, and an inflation rate that is “still too low.”  With quantitative easing (QE) ending on October 29, Valliere predicted the Fed will wait until as late as next summer before raising rates. It will be a very slow process where the Fed will ensure these rate hikes do not negatively affect the economy.

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