A new broom at the Treasury Department
Joe Biden’s nomination of Janet Yellen as Treasury Secretary, which is supported by some Republicans, fits in with the incoming president’s centrist tendencies. As Treasury Secretary, Yellen is likely to cement the close cooperation between the Treasury and the Fed that has developed during the covid-19 shock.
She can be expected to work well with the current Fed chairman, Trump-appointee Jerome Powell. She is also seen as having a relatively ‘mellow’ approach to banking regulation, an area in which she could have a strong impact. But while Yellen has strong intellectual credentials, she has limited business and limited experience of trade issues, bound to remain a crucial area of US policy in the years ahead.
Janet Yellen is remembered for promoting activist, dovish monetary policies during her time at the Federal Reserve. In particular, Yellen pointed to underlying fragilities in the US labour market to justify continued monetary policy accommodation during her stint as Fed chair in 2014-2018. A strong Keynesian, her calls for fiscal stimulus have become louder in recent weeks as Congress has wavered on providing additional covid-19 relief to households.
While Yellen’s first key task will be to negotiate a stimulus package with Senate Republicans, we believe Yellen might struggle to extract more than USD500-750 bn, far from the USD2 trn package that some Democrats had been hoping for. It should be noted that the Treasury announced at the end of last week its decision not to extend some emergency Fed credit facilities. There is a chance that the Republicans agree to no more than to the reallocation of the funds earmarked for these credit facilities…which comes to around USD500 bn. But USD500 bn could boost Q1 2021 GDP growth by about 5% q-o-q SAAR and may be enough avoid a sharp hit to consumption.
We continue to expect the Fed to undertake ‘Operation Twist’ in December, swapping short-term Treasuries for long-term ones to extend the average maturity of its existing portfolio of Treasuries. Despite encouraging vaccine news, we also believe it is likely the Fed will increase its monthly asset purchases from USD120 bn to USD160 bn in Q1 2021. We believe that the Fed is just as intent on managing the US’s high debt burden (especially the big increase in government debt) as it is on managing the US business cycle. This means the Fed is anxious to place an implicit cap on long-term yields.
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