Investment Institute
Viewpoint Chief Economist

Biden’s Fiscal Reflation

  • 11 January 2021 (5 min read)

Key points

  • We finally have a clear picture of the parliamentary parameters for Biden’s economic policy. The fiscal push may be a headache for the Fed, and we expect market pressure on the central bank to peak when we reach collective immunity. However, in the meantime, business conditions will first deteriorate further given the bad news on the pandemic front.

The US elections finally seem to be over, and beyond the striking pictures of the capitol under siege, the certification process has been completed, a new administration will take over on January 20th and the Democrats will command a slim majority in the Senate. This has triggered a re-appraisal of long-term interest rates in the US which have broken above 1% on the 10-year maturity, while the equity market remained buoyant. By and large we think this market’s reaction is rational. We explore here the likely shape of Biden’s economic policy under the final parameters. Even if the new President will face some hurdles in pushing his agenda through – we should have in mind the difficulty Barack Obama had to get his healthcare bill in despite a much more comfortable parliamentary majority – we think that the enhanced emergency stimulus, going beyond the USD 900bn package agreed between the two parties just before the festive break, will be implemented. While some components of Biden’s medium-term platform look very difficult to pass, in general we expect a further rise in public spending above and beyond the 2021 push. The medium-term spending strategy is supposed to be fully offset by higher taxes, but we think the likeliest outcome is a rise in the deficit. The enhanced stimulus – probably ending up a c.10% of GDP – may be a headache for the Fed. Its forward guidance is consistent with more monetary easing if the macro situation deteriorates, but assuming the new package fully offsets the impact of the stubborn “winter wave” of Covid, contrary to the ECB the Fed has not explicitly pledged to fight any “unwarranted tightening in financial conditions” which the market would bring about. The rise in the supply of US treasuries will not necessarily be met by a faster pace of bond buying by the central bank. We expect market pressure on the Fed to peak by the time “collective immunity” is finally achieved and the economy goes through another spectacular, albeit transitory, rebound. However, in the short run, business conditions are likely to deteriorate further given the latest pandemic data. The emergence of the “UK variant” is a particular concern.

Have our latest insights delivered straight to your inbox

SUBSCRIBE NOW
Subscribe to updates.

Related Articles

Viewpoint Chief Economist

Independence Wars Ahead?

Viewpoint Chief Economist

European Convergence

Viewpoint Chief Economist

Draghi Captures the Zeitgeist

    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

    Back to top