Fiscal stimulus on the fast track now
Weekly Cash Commentary
Those of us focused on the front end of the yield curve got some good news last week, but for the wrong reason. The poor nonfarm payrolls report showed that the winter has been as rough on businesses as feared, with January figures coming in under consensus and November and December’s revised downward. But the disappointment probably cinches the passage of President Biden's $1.9 trillion stimulus proposal. While we don’t know exactly how the Treasury Department will fund the package, it should issue enough Treasury bills to raise the curve on the short end. Even a small bump would be welcome.
The Federal Reserve won’t react to that development if it happens. Its last Federal Open Market Committee meeting reinforced it will keep rates in the 0-0.25% range for some time and continue to purchase U.S. bonds and mortgages (quantitative easing, or QE). But more and more people are talking about the potential for the Fed to reduce the latter, a process known as tapering. It is easier for a central bank to buy more securities on the open market than to buy less. Policymakers must communicate their intention carefully lest another “Taper Tantrum” occur, such as the one that happened in 2013. We think they won’t curtail asset purchases or raise rates until 2022. When they do, they must inform the markets well in advance.