US fiscal policy raises many questions about its impact (on the economy, on monetary policy, on longterm interest rates, the dollar and more generally the US fixed income market). The US authorities have indeed decided to stimulate an economy that is close to full employment, something that has never been seen in American history. This will boost growth and inflation (in the short term) and at the same time lead to an increase in bond supply, just as the Fed is raising its key rates and reducing the size of its balance sheet. We return here to the different scenarios that can be considered on public spending. Ultimately, we find that the economic impact will be substantial but temporary and that it it will have a limited impact on the yield curve,  a mixed on credit and could ultimately weigh on the USD.

After the Tax Cuts and Jobs Act of 2017 (TCJA), a major tax overhaul approved just before the end of the year that introduced significant tax cuts for both individuals and corporations, in early February the U.S. Administration passed the Bipartisan Budget Act of 2018 (Budget Act) that would add increased government spending on top of the fiscal stimulus. Immediately after, the White House presented the President’s Fiscal Year Budget 2019 (President’s Budget) further pushing, among other actions, for increased infrastructure spending. All these measures would add upside risks to our base case economic projections for growth and inflation for which we provide estimates herein.