Figure 1: Biden pumps up fiscal policy

Source: Moody´s Analytics
 
In their 15 January US Economic Notes, the US Deutsche Bank Research economics team point out that they had revised up their 2021 real GDP growth forecast by two percentage points to 6.3% (Q4/Q4) in their 7 January commentary. In addition, they revised down unemployment rates to 4.3% from an earlier 5%, “driven by an expected rise in the labour force participation rate, which should move back towards the pre-pandemic level about two percentage points above current readings”.

The contents of the American Rescue plan include:

• Funding to provide individuals with economic security for the duration of the pandemic – in the form of a further Economic Impact Payment of US$1,400 per person for eligible recipients. The payments would be on top of the US$600 approved by Congress in December and sent out in early January 2021 – making a total of US$2,000. “The new payments would go to adult dependents that were left out of the earlier rounds, like some children over the age of 17. It would also include households with mixed immigration status, after the first round of US$1,200 cheques left out the spouses of undocumented immigrants who do not have Social Security Numbers,” added CNN on 15 January.¹
• Funding for state and local governments.
• A US$15bn new grant program for small business owners, separate from the existing Paycheck Protection Program.
• A US$35bn investment in some state, local, and non-profit financing programmes that make low-interest loans and provide venture capital to entrepreneurs.
• Enhanced unemployment benefits and expanded refundable tax credits.
• Funding for critical workforce supports – such as re-opening schools and improving childcare facilities.
• Funding to help manage the virus, such as the vaccine distribution plan and scaling up of testing. It also includes the hiring 100,000 public health workers, nearly tripling the community health workforce.

"[The stimulus] is a key reason the pandemic has done substantially less harm to the US economy than most others"
Matthew Luzzetti, US Chief Economist, Deutsche Bank Research

“The number one priority for the new administration is getting an additional round of Covid relief passed,” said Deutsche Bank’s US Chief Economist Matthew Luzzetti in a Podzept podcast, Biden’s First 100 Days.² “This is a meaningful path to growth this year,” he added.

Luzzetti’s team notes that this first phase of the Biden plan is aimed at combatting the Covid pandemic and addressing the near-term economic fallout from the virus. “The second phase, which is expected to focus on longer-term priorities such as infrastructure and tax reform, will likely be rolled out next month at Biden's first address to a joint session of Congress,” they explain in their 15 January US Economic Notes.

Figure 2: Market increased rate hike prospects as taper talk begins

Source: Bloomberg Finance LP, Deutsche Bank Research

The anticipated upgrade in economic growth and the labour market is, note Deutsche Bank Research economists in Fed Watcher: Fiscal fill up could bring forward tapering, but inflation is the ultimate arbiter (11 January), pulling forward Federal Research QE tapering to year end. “Officials are not particularly likely to feel the need to add more stimulus by extending weighted average maturity (WAM) or increasing the pace of their purchases as long as financial conditions remain supportive. Indeed, they sound more willing to bring forward the timing of tapering their bond purchases, obviously depending on how the economy evolves over the New Year,” they explain.

“We expect the Fed to begin signalling its tapering intentions at the June Federal Open Market Committee (FOMC) meeting once they have received convincing evidence that the vaccine roll-out is proceeding in line with expectations and commence a gradual taper in December,” they add. The team has also brought forward their expectation for lift-off to Q4 2023 from the first half of 2024 but note, “The key risk is that both of these actions are delayed due to insufficient inflation pressures”. Key points to note from the 15-16 December 2020 FOMC meeting minutes ⁵ include:

• U.S. real gross domestic product (GDP) was continuing to recover in Q4 2020, but at a more moderate pace than its rapid Q3 rate, and that the level of real GDP remained well below its level at the start of 2020.
• Consumer price inflation through October—as measured by the 12 month percentage change in the PCE price index—remained notably below the rates seen in early 2020.
• The nominal U.S. international trade deficit widened in October. Both imports and exports continued to rebound from their collapse in the first half of the year. Goods imports in October rose above their January level after several months of strong growth. Goods exports, however, had only recovered 75% of their decline since January despite brisk growth in agricultural exports. Services trade remained depressed, driven by the continued suspension of most international travel.
• Prices of global risky assets increased notably, implied volatility dropped sharply, and the dollar depreciated against most currencies. Most advanced foreign economy sovereign yields were little changed, as policymakers in several countries announced additional actions aimed at maintaining accommodative financial conditions.
• Financing conditions in capital markets continued to be broadly accommodative, supported by low interest rates and high equity valuations.