Manchin’s announcement that he will vote against BBB constitutes a kind of incident study. The following are market indicators of expected inflation and economic activity.
figure 1: The five-year inflation break-even point is calculated as the five-year treasury bond yield minus the five-year TIPS yield (dark blue line). The five-year break-even point is adjusted by the inflation risk premium and liquidity premium per DKW (light blue thin line) ), the five-year five-year forward expected inflation is calculated from the yield of Treasury bonds and TIPS (red), both in %. Source: FRB through FRED, Ministry of Finance, King, Walsh, and Wei (2019) After D’amico, Kim and Wei (DKW) interviewed on 12/22, and the author’s calculations.
The five-year inflation balance from Friday’s close (12/17) to Monday’s close (12/20) has hardly changed, which shows that—consistent with most analyses—the BBB channel has minimal impact on inflation (see [1], [2]). It would be interesting to know what the adjusted (for maturity, liquidity premium) DKW estimates are, but these estimates only extend to 11/30 (thin blue line).
What is the impact on economic activities? The five-year TIPS yield has also barely changed, while the 10-year to 3-month Treasury bond spread has remained unchanged from Friday to Monday.
figure 2: The five-year TIPS yield (blue-green, left scale) and the ten-three-month treasury bond maturity spread (pink) are all expressed in %. Source: FRB calculated by FRED and the author.
Event research relies on the lack of concurrent events during the inspection window. Obviously, the news about omicron exceeded expectations during the weekend, so this is not a clean test. In addition, even before Manchin’s announcement, the outlook for the BBB had gradually diminished over time. Therefore, the relevant window may not extend from Friday to Monday.
PredictIt does not measure what the relevant results of the BBB are (for example, the passage of the BBB in January), but it does have one passed before December 23 (where the odds began to drop around November 26), and it did indeed fall on July 1. There is one amount in the parcel passed before the date. The latter rose by $0.6 trillion, from 21 cents on 12/18 to 40 cents on 12/19.
image 3: PredictIt is betting that the settlement plan will be 7/1, 0.6 trillion US dollars or less (yellow-green), and more than 0.6 trillion US dollars (up). source: Predict it, Visit the Central Committee at 6:40 pm, and the author’s calculations.
With this in mind, I still believe that the trend of financial indicators over the weekend reflects the news about Manchin’s decision.
