There is a renewed promise of fiscal policy contributing to economic growth. Does this promise bring potential or risk???
Monetary policy has been carrying the weight of stimulating economic growth for years. Now that Washington will not be divided, there is increasing likelihood that we will see fiscal policy join the fight. There is debate over the effect increased fiscal policy will have on the economy.
Upside
Fiscal policy accommodation, through tax breaks and infrastructure improvements would allow for economic growth in a period where the Federal Open Market Committee (FOMC) feels the need to raise rates. If economic growth were to accelerate, the FOMC would be warranted in rate hikes going forward. Rate hikes on the surface don’t sound positive, however they would moderate growth, keeping our economy from over-heating as well as increasing their ammunition in the event of a recession. Stock prices could benefit from the increased liquidity from fiscal stimulus. However, it would likely see a volatile ride, as fiscal policy would be off-set at times by monetary policy contraction.
Downside
Fiscal stimulus is coming at an unusual period of economic growth. It typically comes during recessions as a tool to reaccelerate the economy. The attempt at stimulus comes when fiscal tightening is usually occurring to balance the budget and spending. Also concerning is the ever-strengthening dollar that comes with higher GDP and tightening monetary policy. A tightening dollar decreased profitability of large multi-national corporations based in the US.
US Data
Retail sales increased substantially in October, increasing by 0.8% after a strong 1% increase in September. Those figures could lead to a strong retail spending season for the holidays. Consumer Prices, a proxy for inflation increased 2.1% YoY excluding fuel and food (Core). As fuel prices improve, headline inflation will come more in line. Building Permits increased 0.3% and housing starts increased by 25.5%… That is right 25.5%, that equated to 269,000 new starts. This should provide for a good closing season in the spring[1].
Conclusions
There are ups and downs either way with fiscal policy. The current landscape appears to provide for increased domestic growth with a focus on small companies as well as financial companies. The issue would be that tighter monetary policy and a strengthening dollar would be a drag on multi-national corporations and duration focused fixed income securities.
Welcome to the table fiscal policy, monetary policy has been here for years and I am sure it welcomes the help!
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[1] www.investing.com – economic calendar