BMO Focus: Biden Time
- Keywords:
- election
On January 20, Joe Biden will be sworn in as the 46th President of the United States, along with Kamala as Vice President. Within a few days after the event, Jon Ossoff and Raphael Warnock will have likely been sworn in as U.S. Senators (Georgia law gives the 159 counties and the secretary of state 17 days after the election, by January 22, to certify the results), giving the Democrats control of the Senate along with the White House and the House of Representatives. This ‘blue wave’ alignment will likely result in larger government outlays, higher taxes and bigger budget deficits than a divided government or gridlock scenario, but it’s uncertain how huge (or progressive) the discrepancies might be.
Since the Georgia results, the major stock market indices hit record highs at one point, even in the wake of the tumult on Capitol Hill. This partly reflects the assumption that the Biden Administration and Democrat-controlled Congress will likely end up following a more moderate or centrist policy course. Supporting this assumption is the fact that the Democrats have the slimmest majority required to control the Senate at just 50 seats (including two Independents who caucus with the Democrats) and with incoming Vice President casting any tie-breaking vote. This means the views of moderate Democrats, and perhaps even moderate Republicans, could carry more weight in policy outcomes. And, while the Democrats maintained control of the House, they did so with a smaller 11 seat majority (233 vs 222 with 2 vacancies) compared to 36 seats after the 2018 election (235 vs 199 with 1 vacancy). History also reveals that campaign platforms and promises are sometimes forgotten or broken amid the politics of governing.
Investors are betting that beyond the economic boost from any immediate pandemic-related measures (see below), prospective policy changes in the areas of immigration, education and health care along with some form of a Green New Deal will also provide an economic boost over the medium term. And, together, these should counter the impacts of increased taxes on corporations and high-income individuals. Meanwhile, the prospects for bigger budget deficits (Treasury supply pressures) and stronger economic growth (inflation pressures) are bothering the bond market a bit. The benchmark 10-year yield hit 1.15% at one point this week, the highest since March. There’s concern that the start of Fed rate hikes could be pulled forward into 2023 or earlier, instead of the 2024 liftoff portrayed in the FOMC’s recent ‘dot plot’. And, that the tapering of Fed asset purchases, generally expected to commence sometime next year, could be pulled forward to the end of this year.
Opening Policy Salvo
On January 14, President-elect Biden detailed his proposed “American Rescue Plan”, a $1.9 trillion package designed to combat COVID-19 directly and support the families, communities and small businesses impacted by the pandemic. This weighs in at a whopping 9.0% of GDP and comes on the heels of the $900 billion relief package (4.3%) already passed by Congress and signed into law on December 27. While simply a package of proposals at this juncture, the plan will act as a litmus test of the ability of the incoming Administration to win over moderates and work in a bipartisan fashion. The major facets of the plan include the following.
A roughly $400 billion envelope of direct response measures that includes:
- $70 billion for a national vaccination program and expanded testing. The goal is to get 100 million jabs in the first 100 days. Note that, so far, almost 12 million doses have been distributed or about 3.4% of the population has been vaccinated, far from the ‘herd immunity’ target of around 70%.
- $170 billion to provide schools and other educational institutions the resources they need to reopen safely.
- Expanding access to emergency paid leave and extending it until September.
- Hiring 100,000 public health workers for vaccine outreach and contact tracing.
A more than $1 trillion envelope of support programs for families that includes:
- Stimulus checks of $1400 per person, on top of the $600 already issued. Last year’s proposed $2000 “Recovery Rebates” were a major stumbling block to getting last month’s relief package passed and signed. Unless specifically targeted to those individuals and families most in need, this measure has been publicly opposed by moderate Democrat Senator Manchin of West Virginia. The Committee for a Responsible Federal Budget (CRFB) pegs the price tag at $465 billion.
- Increasing the supplement on weekly unemployment insurance (UI) benefits to $400 from $300 and extending it from mid-March to September. This is lower than the rumoured return to $600, but still a controversial measure. As of December 26, there were 18.4 million workers receiving regular and other UI benefits.
- Extending from March/April to September the Pandemic Emergency Unemployment Compensation program (PEUC, for workers exhausting their regular benefits) and the Pandemic Unemployment Assistance program (PUA, for workers not normally qualifying for UI benefits). There are currently 11.6 million workers covered by PEUC and PUA, and the CRFB costs the combined increase and extension of UI benefits at approximately $350 billion.
- Increasing for one year the Child Tax Credit to a refundable $4000 for one child or $8000 for two or more children to reimburse up to 50% of childcare expenses (worth approximately $120 billion according to the CRFB).
- Doubling the existing $25 billion rental assistance program along with $5 billion to help cover home energy and water bills and $5 billion to address homelessness.
- Extending the eviction and foreclosure moratoriums to September. Currently, the former expires at the end of this month and the latter has already expired.
- Increasing the federal minimum wage to $15 per hour from $7.25 currently... always controversial.
A $440 billion envelope of programs for communities and small businesses that includes:
- $350 billion for aid to state, local and territorial governments. These funds would be earmarked for front-line worker payrolls, vaccine distribution and contact tracing, and school reopening. However, support for these jurisdictions was also a major stumbling block to getting last month’s relief package passed.
- $50 billion for grants to small businesses ($15 billion) with the remaining funds used as capital to support up to $175 billion in loans.
- $40 billion split evenly between relief for transit systems and support for tribal governments.
The Administration’s goal is to get as many of these deficit-financed measures, and as much of their proposed dollar magnitudes, passed as quickly as possible. Even if it is half successful on the latter front, that’s still a meaty $950 billion or 4½% of GDP. And, the Administration intends to follow this package with the “American Recovery Plan” which will tackle the other agenda items including climate change, infrastructure, health care, education, immigration and, of course, the tax increases to help pay for these policies. This could take us deep into this year or early next, when another important decision must be made.
Fed Up
Jerome Powell’s tenure as Fed Chair ends in February 2022 and, as president, Joe Biden must decide to re-nominate or replace him (Powell’s tenure on the Board of Governors ends in 2028). It could go either way, but we read the odds as favouring re-nomination.
It’s common for presidents to appoint Fed chairs who share the same party affiliation. Jimmy Carter nominated Paul Volcker, Ronald Reagan did Alan Greenspan, George W. Bush appointed Ben Bernanke, Barack Obama did Janet Yellen, and Donald Trump nominated Jerome Powell. However, given the timing of the start of a new administration and the end of a Fed chair’s tenure, the incumbent is often re-nominated even when they have a different party affiliation. Reagan first re-nominated Volcker before turning to Greenspan, Clinton re-appointed Greenspan (and did so a second time), and Obama first re-nominated Bernanke before giving Yellen the nod. In this vein, before Trump’s decision in 2018, there had been an unbroken tradition—dating back to 1935—that Fed chairs serve at least a second term unless they resign.
If Biden opts to replace Powell, the person must already be a Board member. Lael Brainard, the sole Democrat on the Board, who was reportedly in contention to be Treasury Secretary is, arguably, the most dovish Board member and among the most dovish FOMC participants. There is also one vacancy on the Board and Biden could fill this position with an eye to replacing Powell. As well, Richard Clarida's term ends next January, but he is eligible to be reappointed.
Finally, although Powell is a Republican, he was initially nominated to the Board in 2011 by President Obama, when Biden was VP, as a candidate that could muster bipartisan support. What better way to demonstrate a renewed effort at bipartisanship than re-nominating an original bipartisan candidate?
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Michael Gregory, CFA
Deputy Chief Economist & Managing Director
Michael is part of the team responsible for forecasting and analyzing the North American economy and financial markets. He has spent his career working in either ec…(..)
View Full Profile >On January 20, Joe Biden will be sworn in as the 46th President of the United States, along with Kamala as Vice President. Within a few days after the event, Jon Ossoff and Raphael Warnock will have likely been sworn in as U.S. Senators (Georgia law gives the 159 counties and the secretary of state 17 days after the election, by January 22, to certify the results), giving the Democrats control of the Senate along with the White House and the House of Representatives. This ‘blue wave’ alignment will likely result in larger government outlays, higher taxes and bigger budget deficits than a divided government or gridlock scenario, but it’s uncertain how huge (or progressive) the discrepancies might be.
Since the Georgia results, the major stock market indices hit record highs at one point, even in the wake of the tumult on Capitol Hill. This partly reflects the assumption that the Biden Administration and Democrat-controlled Congress will likely end up following a more moderate or centrist policy course. Supporting this assumption is the fact that the Democrats have the slimmest majority required to control the Senate at just 50 seats (including two Independents who caucus with the Democrats) and with incoming Vice President casting any tie-breaking vote. This means the views of moderate Democrats, and perhaps even moderate Republicans, could carry more weight in policy outcomes. And, while the Democrats maintained control of the House, they did so with a smaller 11 seat majority (233 vs 222 with 2 vacancies) compared to 36 seats after the 2018 election (235 vs 199 with 1 vacancy). History also reveals that campaign platforms and promises are sometimes forgotten or broken amid the politics of governing.
Investors are betting that beyond the economic boost from any immediate pandemic-related measures (see below), prospective policy changes in the areas of immigration, education and health care along with some form of a Green New Deal will also provide an economic boost over the medium term. And, together, these should counter the impacts of increased taxes on corporations and high-income individuals. Meanwhile, the prospects for bigger budget deficits (Treasury supply pressures) and stronger economic growth (inflation pressures) are bothering the bond market a bit. The benchmark 10-year yield hit 1.15% at one point this week, the highest since March. There’s concern that the start of Fed rate hikes could be pulled forward into 2023 or earlier, instead of the 2024 liftoff portrayed in the FOMC’s recent ‘dot plot’. And, that the tapering of Fed asset purchases, generally expected to commence sometime next year, could be pulled forward to the end of this year.
Opening Policy Salvo
On January 14, President-elect Biden detailed his proposed “American Rescue Plan”, a $1.9 trillion package designed to combat COVID-19 directly and support the families, communities and small businesses impacted by the pandemic. This weighs in at a whopping 9.0% of GDP and comes on the heels of the $900 billion relief package (4.3%) already passed by Congress and signed into law on December 27. While simply a package of proposals at this juncture, the plan will act as a litmus test of the ability of the incoming Administration to win over moderates and work in a bipartisan fashion. The major facets of the plan include the following.
A roughly $400 billion envelope of direct response measures that includes:
- $70 billion for a national vaccination program and expanded testing. The goal is to get 100 million jabs in the first 100 days. Note that, so far, almost 12 million doses have been distributed or about 3.4% of the population has been vaccinated, far from the ‘herd immunity’ target of around 70%.
- $170 billion to provide schools and other educational institutions the resources they need to reopen safely.
- Expanding access to emergency paid leave and extending it until September.
- Hiring 100,000 public health workers for vaccine outreach and contact tracing.
A more than $1 trillion envelope of support programs for families that includes:
- Stimulus checks of $1400 per person, on top of the $600 already issued. Last year’s proposed $2000 “Recovery Rebates” were a major stumbling block to getting last month’s relief package passed and signed. Unless specifically targeted to those individuals and families most in need, this measure has been publicly opposed by moderate Democrat Senator Manchin of West Virginia. The Committee for a Responsible Federal Budget (CRFB) pegs the price tag at $465 billion.
- Increasing the supplement on weekly unemployment insurance (UI) benefits to $400 from $300 and extending it from mid-March to September. This is lower than the rumoured return to $600, but still a controversial measure. As of December 26, there were 18.4 million workers receiving regular and other UI benefits.
- Extending from March/April to September the Pandemic Emergency Unemployment Compensation program (PEUC, for workers exhausting their regular benefits) and the Pandemic Unemployment Assistance program (PUA, for workers not normally qualifying for UI benefits). There are currently 11.6 million workers covered by PEUC and PUA, and the CRFB costs the combined increase and extension of UI benefits at approximately $350 billion.
- Increasing for one year the Child Tax Credit to a refundable $4000 for one child or $8000 for two or more children to reimburse up to 50% of childcare expenses (worth approximately $120 billion according to the CRFB).
- Doubling the existing $25 billion rental assistance program along with $5 billion to help cover home energy and water bills and $5 billion to address homelessness.
- Extending the eviction and foreclosure moratoriums to September. Currently, the former expires at the end of this month and the latter has already expired.
- Increasing the federal minimum wage to $15 per hour from $7.25 currently... always controversial.
A $440 billion envelope of programs for communities and small businesses that includes:
- $350 billion for aid to state, local and territorial governments. These funds would be earmarked for front-line worker payrolls, vaccine distribution and contact tracing, and school reopening. However, support for these jurisdictions was also a major stumbling block to getting last month’s relief package passed.
- $50 billion for grants to small businesses ($15 billion) with the remaining funds used as capital to support up to $175 billion in loans.
- $40 billion split evenly between relief for transit systems and support for tribal governments.
The Administration’s goal is to get as many of these deficit-financed measures, and as much of their proposed dollar magnitudes, passed as quickly as possible. Even if it is half successful on the latter front, that’s still a meaty $950 billion or 4½% of GDP. And, the Administration intends to follow this package with the “American Recovery Plan” which will tackle the other agenda items including climate change, infrastructure, health care, education, immigration and, of course, the tax increases to help pay for these policies. This could take us deep into this year or early next, when another important decision must be made.
Fed Up
Jerome Powell’s tenure as Fed Chair ends in February 2022 and, as president, Joe Biden must decide to re-nominate or replace him (Powell’s tenure on the Board of Governors ends in 2028). It could go either way, but we read the odds as favouring re-nomination.
It’s common for presidents to appoint Fed chairs who share the same party affiliation. Jimmy Carter nominated Paul Volcker, Ronald Reagan did Alan Greenspan, George W. Bush appointed Ben Bernanke, Barack Obama did Janet Yellen, and Donald Trump nominated Jerome Powell. However, given the timing of the start of a new administration and the end of a Fed chair’s tenure, the incumbent is often re-nominated even when they have a different party affiliation. Reagan first re-nominated Volcker before turning to Greenspan, Clinton re-appointed Greenspan (and did so a second time), and Obama first re-nominated Bernanke before giving Yellen the nod. In this vein, before Trump’s decision in 2018, there had been an unbroken tradition—dating back to 1935—that Fed chairs serve at least a second term unless they resign.
If Biden opts to replace Powell, the person must already be a Board member. Lael Brainard, the sole Democrat on the Board, who was reportedly in contention to be Treasury Secretary is, arguably, the most dovish Board member and among the most dovish FOMC participants. There is also one vacancy on the Board and Biden could fill this position with an eye to replacing Powell. As well, Richard Clarida's term ends next January, but he is eligible to be reappointed.
Finally, although Powell is a Republican, he was initially nominated to the Board in 2011 by President Obama, when Biden was VP, as a candidate that could muster bipartisan support. What better way to demonstrate a renewed effort at bipartisanship than re-nominating an original bipartisan candidate?
What to Read Next.
Implications of a Democratic Senate
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The Senate races in Georgia have given Democrats complete but narrow control of Congress and changes the expected policy landscape. There is now grea…
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