First, the good news on Biden’s stimulus3 min read . Updated: 13 Jan 2021, 05:03 PM IST
The implications for investors of unified government and a boost in stimulus will be mixed but initially good for stock prices
After last week’s special Senate elections in Georgia, Democrats are about to attain unified—though narrow—control of Washington. With that, the economy will likely be at the receiving end of significantly more federal support than most on Wall Street had expected.
It is a shift that could change the contours of the U.S. economy in the year ahead, accelerating the rebound that will likely come as more Americans are vaccinated against Covid-19 and allowing the Federal Reserve to begin lifting its foot off the accelerator sooner. It also could bring about higher taxes, more regulation and stepped-up deficit worries, but those concerns might not be front and center for some time.
One of Congress’s first orders of business following President-elect Joe Biden’s inauguration on Jan. 20 will likely be putting forward another relief package in response to the Covid-19 crisis. Before Georgia’s special elections, when many thought at least one Republican candidate would prevail, leaving the Senate under GOP control, economists and political analysts didn’t expect much in the way of additional aid. That has changed.
Now, another round of relief is widely expected, with the money likely going toward some combination of another round of household checks, an extension of enhanced unemployment benefits that are set to expire mid-March, small-business support and, perhaps, more state and local aid. Later there would be a push for spending aimed at infrastructure projects and clean-energy programs.
The scope for spending could be more limited than in the blue-wave scenarios Wall Streeters contemplated ahead of November’s election that foresaw Democrats gaining, rather than losing, seats in the House and capturing a bigger lead in the Senate. Moderate Democratic representatives and senators will hold more sway, and they will balk if they believe the price tag has become too high. Sen. Joe Manchin of West Virginia, a centrist Democrat, already has indicated he would like additional household relief efforts to be targeted at people in need, as opposed to another round of payments that go to most Americans.
Mr. Biden also might want to limit the bills’ scope in hopes of getting some Republicans in Congress on board. And in the wake of last week’s mobbing of the Capitol by pro-Trump rioters, some Republicans could be receptive to a bill that allows them to reach across the aisle.
Even if the resulting coronavirus-relief package doesn’t live up to the dreams of progressive Democrats, it still could have a big impact on the economy’s growth trajectory. For example, Jefferies economists estimate that $1 trillion in additional spending would add two percentage points to economic growth over the next two years. They forecast that this would be enough for gross domestic product to close the output gap (the difference between where it is now and its potential, or where it should be) sometime next year—one to 1½ years earlier than would otherwise be the case. That would drive unemployment down more quickly and inflation back toward the Fed’s 2% target sooner. The Fed would likely remain accommodative, but the firm’s economists think the yield on the 10-year Treasury could hit 2%, versus the current 1.13%, by the end of 2021.
Higher taxes also could be in the offing, but maybe not this year. Moving to raise them now, when the country is still gripped by the pandemic, is a nonstarter. And with Democrats’ hold on Congress tenuous, worries about voter backlash in 2022 limit how far they will go. Cornerstone Macro policy strategist Andy Laperriere suggests any such move might include an increase in the corporate rate from the current 21% to 25%, leaving it below the 35% it was at before the 2017 tax cuts. He also envisions measures that target companies that pay low effective rates—big tech, in other words.
This opens the possibility that at some point the U.S. will enter an environment in which worries about higher rates and taxes start seriously rattling financial markets. Before that happens, though, there could be an easing of Covid-19 concerns and a government-supported bounce in growth that makes investors even more ebullient.
This story has been published from a wire agency feed without modifications to the text.