Janet Yellen Image Credit: Bloomberg

The new US President Joe Biden’s nominee for Treasury Secretary Janet Yellen’s testimony before the Senate before her official appointment has unwittingly become a preview of the new administration’s economic policy.

Yellen urged lawmakers on Tuesday to ‘act big’ on the next coronavirus relief package, adding that the benefits outweigh the costs of a higher debt burden. Her testimony before the Senate Banking Committee, in effect, is widely seen by economists and the Wall Street as a reaffirmation of Biden’s $1.9 trillion stimulus package proposal.

The plan calls for bold investments to jump-start the economy and accelerate the distribution of vaccines to bring the virus under control. Stock indexes were quick to respond as they edged up to record highs on Thursday, propelled by optimism about more pandemic relief to support the economy after data showed a tepid labour market recovery.

Case for spending

The number of Americans filing new applications for unemployment benefits dipped to 900,000 last week, but still remained stubbornly high, raising the risk that the economy will shed jobs for a second straight month in January.

Clearly, by any reasoning, the most recent job data justifies Yellen’s plan for big stimulus, especially when interest rates and inflation are yet to show any sign of acceleration.

Although the headline value of Yellen’s dovishness is already priced in by the investors, the relatively long-term fiscal and monetary easing outlook is giving equity investors the confidence to stay invested and other asset classes too are seeing the positive impact of the impending liquidity bulge.

Clearly, a coordinated fiscal and monetary easing will prod gold investors to turn bullish as the gradual nature of recovery is going to necessitate continued fiscal support that has medium term implications for higher debt burden and inflation. In the forex market, however, the stimulus and Fed’s commitment to keep rates low should keep the dollar tamed even if the economy does well.

Bitter pill

Yellen, for sure has a tough job ahead as her plan is likely to face Republican resistance amid President Biden’s preference for a bipartisan bill. Things are likely to get further complicated as the legislators are likely to be sharply divided on party lines on the upcoming impeachment hearing of Donald Trump and the proposals for fast-tracking a series of tax increases on corporations and wealthy individuals.

Although Democratic control of both chambers of Congress gives Biden an edge, the kind of ambitious stimulus plan his administration has proposed faces challenging legislative dynamics and some serious questions on the efficacy of higher spending on boosting aggregate demand.