BNP Paribas: Investment Outlook 2021 - Legacy of the Lockdowns - Part 2

US WILL SEE THE FED BACK IN THE DRIVER'S SEAT - Part 2

The global economy faced a crisis of unprecedented magnitude following the coronavirus pandemic lockdowns. Part 2: US WILL SEE THE FED BACK IN THE DRIVER'S SEAT.

11.01.2021 | 08:14 Uhr

The US economic recovery will likely be aided by at least some fiscal stimulus even if not the multiple trillions of dollars that investors had hoped for prior to the election. Few significant legislative changes can be expected given a divided Congress, meaning that the Federal Reserve and interest rates will resume their traditional, primary role in the economy.

Policy rates will be steady; with the Fed’s new average inflation targeting framework, the central bank will not raise rates, even if the fiscal stimulus turns out to be much larger than we now expect. Quantitative easing and muted inflation expectations look set to keep longer-term rates low, allowing the economy to recover from the lockdown recessions.

The strength of the rebound will depend on how quickly consumer spending returns to pre-pandemic levels. In contrast to the global financial crisis, when swings in business investment drove gross domestic product (GDP), this time it has been consumer demand.

Personal consumption expenditures are still 2% below end-of-2019 levels, but there is wide dispersion in the growth rate across categories. Money that was not spent on activities either prohibited or unattractive under lockdown (going to a restaurant, for example) was instead directed towards what one could actually do (buying home furnishings) (exhibit 2). Services expenditure should recover in 2021 as restrictions are eased further and the availability of a vaccine allows transportation and leisure activities to resume.

Exhibit-2-change-in-personal-consumption-expenditures-1024x580

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