Curious on where rates are headed through all of 2021 and why? Check out our 2021 Interest Rate Outlook.

Biden unveiled his recovery plan. Biden’s critical first move, on which much political capital for the rest of his four-year term will depend, should be regarded as the opening bid in a long, complicated game. The President-elect plans to ask for $1.9 trillion in a package that will include $400 billion in measures directly tied to fighting the pandemic, plus a round of $1,400 checks for all Americans, as well as a doubling of the federal minimum wage, extension of unemployment benefits, and aid for states, cities, and rapid transit systems.  With wafer-thin majorities in both houses of Congress, the chance that the entire package passes in its current form is minimal.

Our Take: The more Biden can win on the most contentious issues, like a $1,400 check for every American regardless of income, the more worried the bond market will become about the possibility that such a flood of money into the US economy will stoke inflation. The greater the fears of inflation, the greater the upward pressure on long term interest rates becomes. Here is the logic: Bond investors don’t like inflation, as any real showing of it reduces the attractiveness of the fixed stream of coupon payments a bond provides. Should inflation rise in a meaningful way, bond investors would begin to sell their bond holdings, driving down prices and causing long term interest rates to rise.

So far, bond markets have reacted to the news of the $1.9 trillion stimulus package with relative calm, despite a jump in the 10-year Treasury yield above 1% after the US Senate elections in Georgia increased the chance of an expansive fiscal policy by the President and Congress. For now, we will be watching the progress of Biden’s stimulus plan closely as it works its way through Congress. Long term rates are certain to react.

Fed Chair Powell pledged he is on Biden’s side – for now.  Well, of course the Fed Chair didn’t explicitly say that he’s backing Biden’s policies, but he might as well have. In a scheduled Q&A last week, Chair Powell tamped down speculation that the Fed would taper its asset purchases – now running at $120 billion a month – aimed at keeping interest rates low, anytime soon. The last time the Fed acted to tap the brakes on its stimulus, back in 2013, bond yields spiked in an event that came to be called the Taper Tantrum. The Fed Chair went out of his way to tell markets last week that the Fed will avoid acting too early to slow its asset purchases and would likely err on the side of acting too late, and not until the jobs market improves dramatically. This means that long term rates could rise markedly before the Fed acts to slow their ascent, aiding Biden in his efforts to pass a sizable stimulus package to get the economy back on track.

Recent economic data implied that a real economic recovery is months away. A slate of uninspiring economic data showed the damage that fading fiscal stimulus and expiring unemployment benefits during an intensifying lockdown can do to economic momentum. Americans pinched pennies over the holiday season as rising COVID-19 case counts and restrictions resulted in a 0.7% decline in December retail sales, the third straight month of dropping sales. Elsewhere, consumer sentiment data showed that Americans felt less positive in their current financial situation, an expected stance as the sluggish coronavirus vaccine rollout gathers pace and government stimulus payments make their way into consumers’ hands. In an unexpected twist, consumer expectations of inflation picked up modestly. On the jobs front, initial jobless claims skyrocketed by 181k to 965k week over week, the highest level since August.