Tug of War Between Fiscal and Monetary Policy

The current environment involves a tug of war between fiscal and monetary policy. On one hand, the Biden administration has implemented significant stimulus spending, resulting in inflationary pressure. On the other hand, the Federal Reserve is trying to control inflation by raising interest rates. The outcome is uncertain, but a reasonable base case scenario suggests that a deep recession may be avoided, although rates may stay higher for longer. This creates both risks and opportunities for investors, as companies that were financed under a rate regime assuming stable rates may now face over-leveraging, while newly created performing credit under the current rate regime is more conservative. Investors should be cautious and think critically about the political and economic motivations at play.