Major political events across the US in the past weeks have spelt dramatic economic changes to the world's leading economy as inauguration day looms near. Importantly, a democratically controlled senate should ease new legislation proposed under Biden, with further stimulus to extend unemployment benefits, virus funding, infrastructure and distress spending all on the table. Markets responded positively to the senate runoff election results, as bond yields and equity prices improved with expectations that more robust fiscal spending should exhibit a positive impact on growth.
Nonetheless, significant challenges still confront the US economy as it navigates the logistically difficult and expensive task of vaccine distribution in the coming year. Undoubtedly, many core indicators will remain subpar for the short-term as more widespread immunisation programs commence. The Federal Reserve expects asset purchases to continue throughout 2021 before slowing down in 2022, as indicators such as unemployment are expected to follow a similar trend. Inflation has been seen as the key influence over the cash rate target, which remains at the effective lower bound as labour market slack and deflated prices across the economy have precluded a price reaction large enough to warrant a policy shift by the Feds. In addition, further uncertainties surrounding future outbreaks as a well as the role of partisanship in Washington all suggest that the post-lockdown rebound will be a gradual and difficult expedition for policymakers in the US.
