US: Split government to put pressure on the Fed to provide more stimulus – Rabobank

Democrats and Republicans have finally passed a bill on a new COVID-19 relief package. It is now up to President Trump to sign the entire bill into law. 

Although it took many months to get to this fiscal stimulus package, the bill only covers the first quarter of 2021. If the Democrats win both run-off elections in Georgia, Congress should give the Fed more discretion, per Rabobank. 

Trump stayed short of stating he would veto the hard-fought bill. Uncertainty partially weighed on the market mood. However, the US dollar is retreating from the highs. Gold, which jumped on Monday after the parties struck a deal, is retreating. 

Key quotes

“Although it took many months to get to this fiscal stimulus package, we should realize that it only covers the first quarter of 2021. Households and businesses may continue to need fiscal support in Q2 and beyond.”

“This covid relief bill is only a temporary solution and we are likely to see another fiscal battle in the first half of 2021. The bargaining power of the two parties will be decided in the two Georgia runoff elections for the Senate on January 5. The negotiations of the current covid relief bill suggest that if the Republicans hang on to their majority in the Senate, the Democrats can forget about the spending spree they have in mind once Biden is inaugurated on January 20.” 

“For the Fed, this fiscal support package reduces the urgency of additional near-term monetary stimulus, although it remains uncertain how much damage the resurgence of COVID-19 will do to the economy and how much further fiscal support will be provided in 2021.”

“If the Democrats don’t win both run-off elections in Georgia, and the Senate Republicans block further fiscal stimulus, there will be more pressure on the Fed to provide monetary stimulus during the course of 2021 if the economic recovery falters.”