US Politics: Yellen nomination a boost to fiscal stimulus prospects… –

Reports that president-elect Joe Biden is to nominate former Fed Chair Janet Yellen to the Treasury Secretary post are an important burnishing of Biden’s pro-spending policy agenda. This agenda was already clear in the run up to the election, given ambitious plans to spend $2trn (approx. 10% of GDP) over four years on renewable energy, and $1.2trn over 10 years on infrastructure.

More significant for the near-term outlook is the sequel to the CARES Act, which contains pandemic-related assistance; the last such bill Democrats passed in October totaled $2.2trn (this failed in the Senate).

Yellen has been outspoken on the need for a strong fiscal impulse, not just during the current crisis, but ‘even beyond that’, as she said in a recent interview.

As one of the most dovish members of the FOMC in her tenure at the Fed, Yellen was also ahead of the curve in recognising the radically different environment for inflation that we find ourselves in.

With the Fed’s new policy framework creating the ideal conditions for higher government spending over the coming years (see here), she is likely to be more cognizant than those outside of the central banking sphere of the real trade-offs between higher spending now and longer run debt sustainability concerns.

This will be important if the government does indeed embark on massive stimulus spending.

…but will she be shackled by Congress? –

While the pieces for a big fiscal push seem to be falling into place, there is one vital piece of the puzzle still missing – a Democrat majority in the Senate.

Congress holds the purse-strings when it comes to tax and spend plans, and without a majority in the Senate, Biden’s team will struggle to get significant spending through without Republican backing.

While compromise is sometimes possible between the two parties, the administration will no doubt face more significant constraints with a Republican-dominated Senate. Democrats missed their best chance to get a clear majority in the Senate by failing to make significant seat gains in the 3 November election.

However, they still have a reasonable shot at a slim majority with the Georgia run-off elections on 5 January. Opinion polling from last week suggests an incredibly tight race, with both seats essentially tied.

Meanwhile, the betting market probability of Democrats winning has moved up slightly, from c.20% last week to 27% as of yesterday.

Betting market probability of Democratic majorities (%)

Source: PredictIt.org