Less than a fortnight before the US election, a new paper from BNP Paribas Asset Management examines Joe Biden’s and Donald Trump’s prospects of favourable White House – and Congress – outcomes. Because without both the Senate and House of Representatives on their side, their ability to deliver on their mandates will be severely hampered.
As is always the case under the US electoral system, what counts most is the size of a candidate’s lead in the few ‘swing’ states most likely to decide the Electoral College vote. This time around, these include Florida, Arizona, Pennsylvania, Wisconsin and Michigan, and while Biden currently leads in these, on polling day, anything can happen – as it did in 2016.
With the economy and COVID often cited as the most important issues for voters, Trump’s dismissive approach to the coronavirus may be costing him. In the wake of his own infection with the virus, there has been little evidence of a new approach by the president to change minds and win over undecided voters.
If Trump is re-elected, it’s most likely to be because of a surprise event in the final campaign days, or that there is a sizeable error in the opinion polls in the swing states, or a large number of votes for Biden are ruled inadmissible.
In 2020, Trump’s platform lacks much in the way of defined policies or strategies. One topic mentioned repeatedly is additional tax cuts, but the odds of pushing those through without the Republicans regaining the House of Representatives – which looks highly unlikely – seem very low.
Without support from both chambers of Congress, a second term for Trump could look similar to the last two years; the focus would be on foreign policy, trade and sector-specific deregulation. These are all areas where the president and his Administration have considerable latitude to manoeuvre without explicit permission of Congress.
Biden’s policy agenda is broad, but at its simplest, the most market-relevant parts can be boiled down to:
Biden’s policies in these areas would see a significant increase in the role of government in the economy.
One important policy area concerns the USD 2.4 trillion fiscal stimulus package that House Democrats approved in October. Should the Democrats gain the White House, the Senate and keep the House, fiscal stimulus on that scale – at around 10% GDP – would lift growth, but also be extremely expensive.
For many of the ambitious, potentially market-moving, parts of Biden’s agenda to be delivered, Democrats will need to take control of the Senate, where Republicans now have a majority of six. Only a portion of Senate seats is up for election this year. While many of these seats are considered extremely safe, around 10 of them will determine the overall outcome – and the current polling in the Senate races is tighter than in the Presidential contest.
The expansionary fiscal policy that followed Trump’s 2016 win was viewed as likely to push up inflation, an outcome the Fed would typically seek to avoid by raising rates. This it did – raising rates on three occasions in 2017, followed by four further moves in 2018. Even so, core inflation only briefly reached 2% in 2018 before slipping back in 2019.
The central bank has drawn lessons from that experience. Its thinking about the conduct of monetary policy has changed, most recently in the new strategic framework announced in August.
No longer will the Fed raise rates simply in response to low unemployment or strong growth; it needs to be accompanied by stronger inflation. Given how flat the Phillips curve is thought to be, there is little immediate prospect of fiscal stimulus stoking inflation.
Aggressive fiscal stimulus under a Biden administration combined with laissez-faire monetary policy should lead the US economy to outperform its counterparts elsewhere in the world for a time.
Read our full preview entitled 2020 US election preview: All or nothing?
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