While waiting for the Fed, don’t forget fiscal policy – BBH

FXStreet (Delhi) – Research Team at BBH, suggests that the focus of most investors is the rate decision by the Federal Reserve today and after the central bank completed its asset purchase program at the end of last year, a rate hike has been understood as a matter of time.

Key Quotes

“Expectations for a June lift-off were dashed by the disappointing economic activity at the start of the year.

However, considerably less appreciated than monetary policy is fiscal policy developments. At the end of last week, an agreement was struck to extend the spending authorization until midnight tomorrow in hopes of reaching a broader agreement on both spending and taxes.

The new Speaker of the House Ryan appears to have helped facilitate the negotiations minimizing the antagonism between parties by not including provisions like the dismantling of the Affordable Care Act (aka Obama Care) or de-funding Planned Parenthood.

Of course, Congress can simply extend the deadline a few days, but the goal is to have an agreement this week.

It is difficult to know what will be in the final bill, but the broad shape is taking place, and it could include lifting the 30-year ban on oil exports.

There are other controversial issues being negotiated, and it is not clear what are negotiating chits and what is truly desired. There are some who want to curb refugees from Syria, relaxing curbs on the financial industry, and are resisting warmer relations with Cuba.

On the other hand, there does seem to be a meeting of the minds over postponing the imposition of a tax on high-value health insurance plans from 2018 to 2020.

Traditionally, the best policy mix for a currency is loose fiscal policy and tight monetary policy. This is the policy mix in the early 1980s, with Volcker lifting rates and Reagan cutting taxes and increasing spending. This was the source of the Reagan dollar rally.

If the compromise sketched out above materializes, the US policy mix will be supportive of the dollar. Fiscal policy, it appears, would be marginally easier as the Fed begins to normalize monetary policy. That said, remember that with 2% core CPI, and 5% unemployment, a 50-75 bp Fed funds rate cannot be regarded as tight by any metric. From the Fed’s point of view, monetary policy is going from super accommodative to very, very easy.”

Research Team at BBH, suggests that the focus of most investors is the rate decision by the Federal Reserve today and after the central bank completed its asset purchase program at the end of last year, a rate hike has been understood as a matter of time.

(Market News Provided by FXstreet)