In today’s briefing:
- Spendthrift US Fiscal Policy Raises Ante on Fed to Prevent Financial System Liquidity Squeeze
- Doesn’t Fed Policy Matter to Stocks Anymore?
Spendthrift US Fiscal Policy Raises Ante on Fed to Prevent Financial System Liquidity Squeeze
- Since the suspension of the debt ceiling last June, federal debt has been increasing at a very rapid rate, an outcome that could eventually have implications for US financial conditions.
- High issuance of T-bills by the Treasury to the public will drain bank reserves, thereby raising the ante on the Fed to make offsetting open-market purchases to reduce liquidity stress.
- The biggest threat to US risky assets is an undershooting of corporate profit expectations. Fiscal policy conduct is supportive for economic growth and profits, as well as risky asset prices.
Doesn’t Fed Policy Matter to Stocks Anymore?
- Does Fed policy matter to stock prices anymore? They do, and the current market advance is consistent with a growing economy and the expectations of rate cuts this summer.
- The market’s focus has pivoted away from interest rates to forecast earnings growth, which is positive.
- This stock market is tracking market behaviour during a mid-cycle expansion that’s driven by P/E expansion while earnings estimates rise and catch up.
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