A Looming Showdown between US Monetary and Fiscal Policy?
US economic activity in early-2018 continues to expand at an above-trend pace, thereby validating the Federal Open Market Committee’s (FOMC) current forward guidance towards three increases in the federal funds rate.
The impending arrival of fiscal policy easing enhances the chances of the Fed’s economic forecasts for 2018 being fulfilled, but there remains considerable uncertainty about the effects of recently passed tax reform.
President Trump’s recently submitted FY2019 budget will take the federal government’s budget shortfall to its largest as a % of GDP, compared to earlier economic expansions, since 1992 and it is also similar to the deficits run during the Reagan Administration, thereby raising the possibility of crowding out private sector investment.
Inward-looking US economic and financial policies, against a backdrop of fiscal profligacy, increase the chances of crowding out due to the onset of higher federal government borrowing costs.
The fiscal policy backdrop has changed considerably since November, but the FOMC’s response has been slow, although this could change at the next policy meeting.
President Trump is keen for fiscal stimulus to gain traction in the real economy, thereby raising the prospect of dovish appointments being made to fill vacant positions on the Fed’s Board of Governors in order to prevent a tough monetary offset.
DeSaque Macro Research Limited was formed by Said DeSaque in April 2012 with the intention of delivering independent global macro investment insights and new thematic long-term ideas to investors, along with an agnostic opinion of the markets.
Said DeSaque has over 29 years of experience working as a professional economist in financial services, primarily based in London. His working role has involved extensive travel around the world, bringing him into contact with investors of different cultural backgrounds and investment requirements. Prior to establishing DeSaque Macro Research, Said held positions as Senior Economist and Investment Strategist at US banks Robert W Baird and William Blair. He began his career as a graduate at PaineWebber in 1986, where he became Head of the London Economics Department in 1996. This role allowed him to engage with senior investment professionals, alongside regulators and provided a unique perspective of market intelligence at work.
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