Having flip-flopped once already, back in September capitulating on expectations for a fiscal stimulus this year (which earlier this year was the basis for the bank’s bullish outlook), Goldman has just flip-flopped again in its views on a covid stimulus deal, and moments ago Goldman’s chief political economist Alec Phillips just sent out a note in which he said that “over the next day or so, Congress is likely to decide whether to pass fiscal relief measures or to push consideration of most of them to next year” adding that “the odds of a fiscal deal before year’s end have been improving” and “at this point, we think it is slightly more likely than not that Congress will pass this week a package similar to the recent $748bn bipartisan proposal, which would be close to our standing assumption of a $700bn (3.3% of GDP) package.” Translation: a deal will pass in the next 48 hours.
And while it appears increasingly likely that a small package will pass this week, Goldman concludes that “this is likely to be the last substantial COVID-relief package unless Democrats win both Senate seats in the January 5 runoff elections in Georgia.”
Here are the main points from the Goldman note:
1. Some COVID-relief provisions are likely to pass this week, but the broad $908bn package that a bipartisan group of senators has released looks fairly unlikely, in our view. Statements from congressional leaders in both parties seem reasonably clear that they do not believe they can leave Washington without an agreement on COVID-relief measures. However, the issues that have hung up fiscal talks for the last few months remain unresolved: state and local fiscal aid, which Democrats seek, and liability protections for businesses, which Republicans want. While there is a small chance that these issues could be resolved soon, in our view the path to a deal at this point appears to be for lawmakers to put both issues aside. Senate Majority Leader McConnell (R) proposed setting these aside last week. As of Monday (Dec. 14) evening, Speaker Pelosi (D) has continued to press for state and local aid. However, comments from other senior Democrats, including Senate Minority Whip Durbin and House Majority Leader Hoyer suggest that Democrats might be willing to support a deal without state and local aid. If congressional leaders put this issue and liability protections aside, it looks likely that a broad package of COVID-relief measures will pass this week.
2. The deadline to announce an agreement is tomorrow or, at latest, Thursday. Congressional negotiators appear to have reached agreement on legislation to fund the government for the remainder of fiscal year 2021 (through Sept. 30, 2021). Legislative text of that spending bill is expected to be released today (Dec. 15). For financial markets, the details of the spending bill are less important than the fact that it sets a deadline for COVID-relief talks. Spending authority for the federal government expires Dec. 18. Without another extension, the federal government would partially shut down. In order to meet that deadline, the House will need to pass its bill and send it to the Senate no later than Thursday. This means that a deal on COVID-relief would need to be added to that bill by Wednesday evening (Dec. 16) or, at latest, Thursday morning (Dec. 17). Even on that timeline, procedural delays could delay final passage past Dec. 18 unless all Senators agree to put aside procedural objections. That said, if a shutdown occurs it would be short-lived with little macroeconomic impact. The next step in the process will be a meeting at 4pm ET today among Democratic and Republican leaders of the House and Senate.
3. Fiscal relief provisions look likely to ride on the spending bill. At a minimum, it seems very likely that Congress will extend several policies that expire around year-end, like broadened eligibility for unemployment insurance (UI), student loan payment deferral, and the eviction moratorium. At this point, congressional leaders appear slightly more likely than not to include most of the other aspects of the bipartisan $748bn proposal (summarized below). The largest of these would be another round of loans through the Paycheck Protection Program (PPP) for hard-hit businesses, payments to states to cover COVID-related education costs, and public health funds for activities like testing and vaccine distribution. A $300/week UI top-up payment through March also looks likely. While we think that there is already some expectation in financial markets that Congress will agree to a broad package this week, we note that as of this morning the “superforecasters” put only a 35% probability on passage of a $750bn or greater package before year’s end.
4. Our base case for additional stimulus remains $700bn (3.3% of GDP). At this point, the discussions appear to be shaping up similar to our own expectations regarding the size of the additional fiscal measures. However, while we believed that Congress would provide around $200bn to state and local governments, it looks likely that if Congress acts this month, it would include only around $100bn for state and local governments, directed to schools.
5. A deal might have limited implications for this week’s FOMC meeting. We believe the Fed is slightly more likely than not to extend the weighted average maturity of its Treasury purchases, though this has been a close call. The announcement of a fiscal agreement prior to the FOMC meeting would reduce the odds of a WAM extension somewhat, although there is a fair chance that a deal would not be finalized until after the FOMC meeting has concluded.
6. If Congress acts this month, it could be the last major installment of fiscal relief. If Congress passes fiscal legislation this month, it will likely create a new set of expiring policies in March or April 2021, which could pressure lawmakers to pass additional fiscal relief. While this might create some upside risk to our fiscal assumptions, we would expect the amount of additional fiscal measures Congress passes next year to be modest. With warming weather and vaccine distribution well underway by that point, another package worth several hundred billion dollars seems unlikely.
7. Another round of payments to individuals and aid to state and local governments could pass in early 2021 if Democrats win both Senate seats in Georgia. Prediction markets currently put the odds that Democrats win both seats at around one in three. If they win both seats, we would expect Democrats to pass additional measures to provide state and local relief as well as payments to individuals, along with some other fiscal priorities that Congress is likely to omit from any fiscal legislation it passes this month. That could add an incremental $300bn to $800bn to the total fiscal relief we expect under a divided government scenario.