Midnight train to Georgia
The two Georgia Senate seats to be disputed in a 5 January runoff election will determine which party controls Senate for the next two years. Keeping one or both of the seats would mean a continuation of Republican control over Senate, and a significant thorn in the side for Democratic president-elect Joe Biden’s ambitious legislative agenda in areas such as the environment, taxation and economic stimulus.
Our base case at this stage is that the Republicans will keep the Senate, and that therefore USD750bn at most can be ‘extracted’ from Senate Republicans for a fiscal package, with little room for a bipartisan deal on large-scale infrastructure spending. Depending on the trajectory of the virus and the roll-out of vaccines, a small Democrat majority in Senate could pave the way for additional fiscal stimulus of the order of USD 500bn—in other words, USD1.25 trn of Covid19-related stimulus in total, well short of House Democrats’ initial demands of USD2.4 trn.
Even in the unlikely event that the Democrats win both seats in January, they would have only a narrow majority of Senate seats, and the more centrist Senate Democrats would have enormous influence over future legislation. These more centrist Democrats would likely rein in the most ambitious policies, including higher taxes.
Be it a narrow Republican or narrow Democratic majority, we continue to think the onus will be on the Federal Reserve to continue to support the recovery. We continue to believe that the Fed’s next major step will be to increase its monthly asset purchases. Along with the consequences of the resurgent coronavirus, ongoing low inflation could be another excuse to ease policy further, in our view.