Rates Tread Water as Vaccine Wait Begins

Presidential transition calmed jittery investors. The biggest news in the holiday-shortened week focused on the pending Presidential transition. On Monday, the General Services Administration Chief told President-elect Joe Biden that the Trump administration is making $7 million in federal funding available for his transition into office after withholding her decision for weeks. As a direct result, President-elect Joe Biden announced his intended nominees for top cabinet and national security positions in advance of his scheduled January 20^th inauguration. Most important for interest rates, markets cheered the planned nomination of former Fed Chair Janet Yellen as Treasury secretary, as she is expected to focus on fixing the US economy and not pursuing a new regulatory regime for banks that some on Wall Street feared. If she secures the position, Yellen will be the first person ever to have been chair of the White House Council of Economic Advisers, Fed chair and Treasury secretary, not to mention being the first woman to lead the Treasury Department.

Our take: It’s a certainty that Yellen and Fed Chair Powell – who is expected to survive the Presidential transition – will work very closely to bring the U.S. economy back to where it was before the coronavirus pandemic. That means that the Fed won’t hike interest rates until it sees the whites of inflation’s eyes, likely not until late 2021 at the earliest. The Fed may also wait until inflation takes hold, which could extend a low interest rate environment.  Yellen’s nomination is also an early signal by Team Biden that they do not expect much cooperation on Biden’s economic agenda from what could be a Republican-controlled Senate. If that turns out to be the case, the Yellen-Powell dynamic duo is probably the best scenario if more stimulus from Congress remains elusive and the Fed is left to continue to do the heavy economic lifting.

Economic data showed America’s economy is losing momentum. Jobless claims, one of our favorite barometers for gauging the economic recovery, surged to 778K, suggesting that widening restrictions to combat the spread of the coronavirus are starting to have an adverse impact on the labor market recovery. Most economists expected a decline to 700K. With almost 13.7 million people combined now on Pandemic Unemployment Assistance (PUA) and Pandemic Emergency UC (PEUC) programs in the week ended Nov. 7, programs expected to expire at the end of the year, the pressure is on Congress to at least address the need for more stimulus. A Democratic president and divided Congress likely mean a persistent fiscal impasse going into 2021.

Elsewhere, a steeper drop than expected in consumer confidence last month – a measure of household attitudes – doesn’t bode well for the holiday shopping season, especially with the expected end to Congress’s income support before year-end. Given that consumer spending drives 70% of America’s economic activity, any hesitation by consumers reverberates negatively throughout the economy. While a unique feature of the COVID-induced recession is a historically large increase in savings, the extra cash is drying up quickly for households with lower-incomes and a higher propensity to consume. For higher-income households, future spending will be particularly dependent on economic activity ahead of widespread vaccine availability. In the meantime, slack in the labor market is high, and wage expectations should remain depressed.