Market update: how American fiscal policy works and why it is important now

Last Thursday the 16th, we held our "Market Update" meeting, a monthy live on the global markets with Marcelo Aagesen, Head of Global Markets, and Niraj Patel, Chief Equities Strategy, both from Itaú Private Bank International. The meeting had as a guest Paresh Upadhyaya, Senior Vice President and Head of Fixed Income at Amundi Asset Management.

U.S. fiscal policy has been undergoing dramatic changes since the pandemic, when there was unprecedented easing in fiscal policy. The cumulative totals are staggering. According to estimates by Upadhyaya, senior vice president at Amundi Asset Management, the cumulative amount since 2020 reaches 7 trillion, almost 35% of U.S. GDP. If added to the monetary policy easing, the total comprises another 29% of the GDP, reaching the percentage of 64%, or 13 trillion dollars.

During the Biden administration alone, three measures were adopted. The easing brought with it inflation, which in June of last year reached 9.1%, with the core reaching 6%. These numbers are also correlated to the conflict in Ukraine and the bottlenecks in the supply and value chains.

The main question today is what will happen from here on out regarding the Biden administration's three measures, as the U.S. is on a debt or deficit budget path. The CPO, the non-partisan budget is projecting an increase from 5.2% of GDP to 9% by 2033. A situation equivalent to that found during World War I – which remains if there is no change in fiscal policy and the budget.

This discussion will probably be the biggest political event in 2023 for the Biden administration. The point to be considered is the question of the debt ceiling or spending cap, with regard to whether or not the debt repayment ceiling will be passed. In Congress, Republicans and Democrats are giving signs that this will not be an easy agreement. For Biden to emerge victorious, it is likely that he will have to give in by cutting some benefits, since the Republicans' demand is to restore fiscal discipline.

Even though the government has already signaled that it does not intend to interfere with social security, health care, or defense - the latter being a common point between both parties - it is still not clear where the required cuts will come from. This could mean a cash-strapped American government as early as the second half of the year, should April's revenue inflow be less than expected.

The market tends to react on everything at the last minute, and has seen this happen other times, such as under the Clinton administration in 1994, for example. In each of these times, there have always been ways to reach an agreement. The Treasury rally has also happened before, and in a way, this helps to strengthen the dollar. The biggest risk is in traditional assets.

Watch the video in full: