Goldman: Democratic Sweep Would Be a Plus for U.S. Economy

A Democratic sweep of the presidency and two branches of Congress would be good news for the U.S. economy, according to Goldman Sachs chief economist Jan Hatzius, who notes it would “likely prompt” him to upgrade his U.S. economic forecast.

The reason: more fiscal stimulus. A Biden presidency along with a Democratic majority in the Senate (it’s assumed the Democrats would retain control of the House of Representatives) raises the probability of a fiscal stimulus package on the order of $2 trillion shortly after the presidential inauguration on Jan. 20 followed by longer term spending on infrastructure, climate, health care and education, writes Hatzius in a new economic report. Higher taxes on corporations and upper income earners would finance the new spending.

Assuming the Federal Reserve doesn’t raise interest rates, such additional stimulus could increase economic output by a potential two to three percentage points and boost core personal consumption expenditures — the Fed’s favored inflation gauge — by 0.2 to 0.4 percentage points, according to Hatzius.

It could also, however, raise the probability of a Fed rate hike one to two years earlier than expected — the Fed has indicated no hikes through until after 2023 — which would surprise financial markets, writes Hatzius. 

“Markets may have become too complacent about Fed policy … If the inflation boost from fiscal expansion comes from a starting point that is closer to 2% than most observers expected just a few months ago, markets may need to build in a risk premium for a more sizable overshoot.”