US: fiscal policy stance moved from neutral to expansionary - Wells Fargo

According to analysts from Wells Fargo, the combination of tax cuts and a boost to spending has moved the stance of federal fiscal policy from neutral to expansionary. September 2019 has the potential to be the next major fiscal Showdown, warned analysts. 

Key Quotes: 

“The combination of corporate and individual tax cuts and a large boost to discretionary spending has moved the stance of federal fiscal policy from neutral to expansionary. At such a late point in the business cycle, expansionary fiscal policy would suggest above-trend economic growth, solid inflation and rising interest rates across the yield curve. Indeed, our 2018 forecast for real GDP growth of 2.9 percent is well above most estimates of potential economic growth, in part due to the recent shift in fiscal policy.”

“The deal agreed to this week once again lifts the BCA’s spending caps, increasing them by about $300 billion over the next two years and devoting about 55 percent of that increase to defense spending. The deal also suspends the debt ceiling until March 2019 and includes an $89 billion supplemental funding bill for disaster relief. In terms of the deficit outlook, our current forecast is for a federal budget deficit of $750 billion in FY 2017 and $950 billion in FY 2018.” 

It is important to note that Congress is not quite done with budgeting for fiscal year 2018. Between now and March 23, Congress will need to pass another bill, likely an omnibus, that divvies up the new top-line spending levels. With the spending caps set, it should be smoother sailing both in the coming weeks and later this year, when Congress appropriates the money for FY 2019. As always, however, an issue unrelated to the budget could tie up the process."

One final point we leave our readers with: September 2019 has the potential to be the next major fiscal showdown. The strict BCA budget caps will kick back in for fiscal year 2020, which begins on October 1, 2019. Furthermore, a debt ceiling reinstatement in March 2019 would leave the U.S. Treasury with about six months of extraordinary measures to work with, though this is a very rough estimate this far out. With the 2020 presidential election looming just 14 months later, September 2019 could shape up to be another critical month for federal fiscal policy and financial markets.”