What A Democratic Sweep Of Congress Means For The Markets

The media attention has focused on the drama in the US Capitol over the last couple of days. As a result, the more relevant event for the markets has gone a little bit under the radar.

After securing the Presidency, Democrats have taken control of the Legislature by the narrowest of margins. And the markets have already started to react.

But there are implications for how currencies and stocks will behave going forward.

The latest developments include a series of speeches by Fed officials that underscore the market relevance of the political change in Washington.

Bostic was perhaps the most dramatic. He said that the Fed might raise rates sooner than expected. The consensus among the market has been for some revision to Fed policy in 2023.

So, “sooner” would presumably be next year.

Mester and Daily also commented on their outlook. They suggested that they saw a better than anticipated recovery in the second half of the year.

Although not specifically addressing the issue of rates, they did not affirm the prior standing line that rates would stay low until needed.

Higher interest rates, so why higher stock market?

Yesterday, President-Elect Biden repeated his pre-election initiative for a third stimulus package.

He said he was looking for as much as $3.0T in new spending. This would already include the balance of the $2,000 stimulus checks.

So far, there hasn’t been any official announcement of what would be in the “tax and infrastructure” package. But the total is above what most analysts had anticipated.

Increased spending has obstacles, however.

The Democrats have a very slim majority. And legally, they would need a majority of 60 Senators to approve any increase in spending.

Democrats only have 50.

What could hit the markets potentially is if Republicans dig in their heels to oppose a spending increase, and Democrats then move to get rid of the 60 majority requirement.

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