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.

    Not for Retail distribution

    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.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

    Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.

    This document has been edited by AXA INVESTMENT MANAGERS SA, a company incorporated under the laws of France, having its registered office located at Tour Majunga, 6 place de la Pyramide, 92800 Puteaux, registered with the Nanterre Trade and Companies Register under number 393 051 826. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

    In the UK, this document is intended exclusively for professional investors, as defined in Annex II to the Markets in Financial Instruments Directive 2014/65/EU (“MiFID”). Circulation must be restricted accordingly.

    © AXA Investment Managers 2021. All rights reserved