The Perfect Balance of Fiscal and Monetary Policy?

Posted by Jacob Radke
August 18, 2023

We are officially one year past the passing of the Inflation Reduction Act (IRA) - which arguably was an entirely inflationary bill with three quarters of a trillion in spending.

We also are around one year past the Chips and Science Act - which offered tax incentives for US semiconductor manufacturing as well as $52 billion for U.S. companies producing computer chips.

US Government spending

However this may be just what the US needed to keep us out of a major recession.

As you are all well aware, the Federal Reserve has raised rates by >5% in the span of 18 months. In historical terms that is blow up territory. Everyone anticipated that and that is why the stock market fell.

Recession seemed like it was the only path forward. Then flash forward to 2023, and it seems like the worst is past us.

Inflation has come down, GDP is still growing and projected to continue, the labor market is still strong, and while there are still some signs that a recession could be coming it’s forecasted to still be much milder than what was forecasted to be before.

Monetary and fiscal policy cooperation

What everyone was focused on was the Fed going from 0% to 5.5%. Dangerous, but necessary, levels of monetary tightening to bring down inflation.

Everyone got so caught up in the monetary side that they may have missed the balancing side, whether intentional or not, of fiscal policy.

Is monetary and fiscal policy supportive to the stock market.

The government started spending more money, in particular on giving incentives to businesses. Tax, carbon, energy, etc. credits. The Fed started to slow down on tightening.

And lo and behold the stock market went up.

But when you support business you also support labor. When you support labor you prop up the American consumer which is the backbone of US GDP.

Retail sales, which came out Wednesday, were 0.7% higher on the month. That is >8% annualized.

The consumer is strong, and that means labor is strong.

But that doesn’t mean it’s strong everywhere and in everything.

I think there is more support than detriment brewing in America. A recession may be on the horizon, but it may just be far enough and just mild enough for the market to not care.

The 2022 saga was all about recession so that reality may have come and gone in markets.

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