Viewpoint: Chief Economist

It may have to hurt

  • 08 March 2021
  • 5 min read

Key points

The Senate passed the fiscal stimulus bill with little concession from Biden. This is likely to lift US long-term rates further, while the Fed remains silent on that front. It would probably take some turmoil on the equity and credit markets to shift the Fed. Conversely, we expect the European Central Bank (ECB) to stand against contagion from the US, with an explicit acceleration in the pace of Pandemic Emergency Purchase Programme (PEPP) to be announced on Thursday, while refraining from triggering the “nuclear options” (raising the PEPP’s envelope or cutting the depo rate again).


Joe Biden managed to get his emergency stimulus plan through the Senate with minimal concessions on the substance of the fiscal measures. While the Democrats had to accept the removal of the minimum wage hike from the bill, the overall quantum of government spending and tax relief is landing very close to their opening gambit. Assuming – as is very likely – the House endorses the Senate version of the bill on Tuesday, the whole process has been swift. The fiscal push will magnify what is shaping up to be a spectacular post-lockdown recovery anyway, given the good progress on the pandemic front in the US. It may not have much impact beyond the end of this year and dealing with “scarring” would be better done via an investment plan for the long-haul which may have become a tough sell. Indeed, the ongoing rebound in market interest rates is making it more difficult to argue the big infrastructure programme would “pay for itself”.

The Fed still does not want to stand in the way of the bond market re-pricing. We suspect many Fed officials believe in a “hump shape” recovery. Once the impact of the fiscal push fades, the economy would start to slow down as 2022 would get in sight, reducing the risk of a lasting surge in inflation. If this scenario turns out right, then the bond market is “wrong” and the ongoing tightening in financial conditions is merely a “bad moment” which will stop spontaneously. It would thus make little sense for the Fed to waste a policy bullet with an operation twist now. The risk is that, left to its own device, the market goes “too far, too quickly”, resulting in an excessive tightening in financial conditions which would smother the recovery after the short stimulus-induced overheating episode. Still, there probably is no “free option”: it’s unlikely that the market can get Fed action – in the form of operation Twist – without first some turmoil on risky assets. In the meantime, if risky markets continue to focus on the improving macro outlook, US long-term rates will continue to rise.

On the other side of the Atlantic, the ECB press conference will focus on how to avoid contagion from the US. We expect the central bank to refrain from using the “nuclear options” (raising the PEPP quantum, cutting the depo rate further), choosing instead to be more explicit in the prepared statement about the need to accelerate PEPP purchases in the current circumstances. The verbal pledge is likely to be strengthened by the publication of data later today reporting, after last week’s negative surprise, an actual rise in the buying pace.

Read the full article
Download article (425.46 KB)

    Not for Retail distribution

    This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.

    This promotional communication 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 that 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.

    Before making an investment, investors should read the relevant Prospectus and the Key Investor Information Document / scheme documents, which provide full product details including investment charges and risks. The information contained herein is not a substitute for those documents or for professional external advice.

    The products or strategies discussed in this document may not be registered nor available in your jurisdiction. Please check the countries of registration with the asset manager, or on the web site https://www.axa-im.com/en/registration-map, where a fund registration map is available. In particular units of the funds may not be offered, sold or delivered to U.S. Persons within the meaning of Regulation S of the U.S. Securities Act of 1933. The tax treatment relating to the holding, acquisition or disposal of shares or units in the fund depends on each investor’s tax status or treatment and may be subject to change. Any potential investor is strongly encouraged to seek advice from its own tax advisors.

    Past performance is not a guide to current or future performance, and any performance or return data displayed does not take into account commissions and costs incurred when issuing or redeeming units. The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. Exchange-rate fluctuations may also affect the value of their investment. Due to this and the initial charge that is usually made, an investment is not usually suitable as a short term holding.