Fed Easing Cycles and Unsustainable Fiscal Policy: Macro Matters
Jul 25, 2024
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Lara Rhame, the chief US economist at FS Investments, joins Ira Jersey and Will Hoffman to tackle the current state of the economy. She discusses how economic resilience is shaping Federal Reserve policy decisions. The trio delves into the potential impacts of upcoming U.S. elections on Treasury markets and the effects of fiscal policy on long-term interest rates. They also explore the implications of sustained deficits and how robust economic indicators contrast with consumer sentiment, revealing a complex landscape for investors.
The U.S. economy shows strong momentum driven by consumption and investment, suggesting sustained growth without imminent contraction.
Uncertainty in fiscal policy, shaped by upcoming elections, raises concerns about long-term sustainability and impacts on the Treasury market.
Deep dives
Outlook on Economic Growth
The overall economy is characterized by strong performance across key sectors such as household consumption, business investment, and government spending, which are contributing to solid economic momentum. Despite expectations for a gradual slowdown, core domestic demand remains robust, with final sales to domestic purchasers exceeding 2.5% growth. Consumption patterns, particularly in the services sector, indicate continued spending habits that will help sustain economic expansion, even as some areas, like durable goods, experience fluctuations. This ongoing growth is viewed as healthy, with employment and wage growth supporting consumer spending levels, suggesting no imminent contraction in the economy.
Implications of U.S. Fiscal Policy
The future of U.S. fiscal policy is uncertain, influenced heavily by the outcomes of upcoming elections, which could lead to significantly different economic trajectories. The discussion centers around the widening deficit which, counterintuitively, persists even amidst strong GDP performance, raising questions about long-term fiscal sustainability. A potential Republican sweep is likely to result in fiscal policies favoring lower interest rates, while a divided government could complicate resolutions to the ongoing deficit issue. The projected impact on the treasury market reflects concerns around increased long-term rates resulting from supply and deficit dynamics that could reshape economic conditions.
Market Dynamics and Investment Strategies
There is an observed shift in stock-bond correlations that has introduced higher volatility in investment portfolios, prompting a re-evaluation of traditional investment strategies. The current economic environment is seen as conducive for exploring alternatives beyond conventional stocks and bonds, especially within private markets which are expected to perform well amid overall growth. Investors are encouraged to seek higher yields in the face of tight credit spreads, capitalizing on the benefits of a solid economic backdrop. Amidst this, concerns around potential policy uncertainty remain prevalent, underscoring the significance of mitigating risks while embracing diverse investment approaches.
The economy is firing on all cylinders and continues to show positive momentum, says Lara Rhame, chief US economist at FS Investments. Rhame joins Macro Matters co-host and Bloomberg Intelligence chief US rates strategist Ira Jersey and senior US rates strategy associate Will Hoffman to discuss the major drivers of the US Treasury market. The trio examine how the Federal Reserve may respond to current and future economic conditions, and the impact of various outcomes across asset classes and the Treasury curve. They also discuss the likely path of fiscal policy and the potential implications of sustained deficit spending on longer-maturity Treasury performance.
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