Fiscal Policy Dominates, The Fed Does Not Matter

The Fed has been in ease mode for over a year now. QT has all but ended, but no matter. A 4% Fed Funds rate when real world prices are growing faster (I almost completely ignore CPI at this point as it is Government propaganda) translates to a negative, real-world, real interest rate environment.

While fiscal spending will only be up modestly this year, don’t lose sight of the fact that the U.S. will run a $2.0-2.5 Trillion deficit - which translates to economic support for the debt-addicted U.S. economy.

Importantly, bank credit growth continues to bounce around between 3-4% (chart below), as it has since August. That will be the true test. When companies report weak numbers in April on the March quarter calls and reduce headcount (I still don’t believe companies are being honest with investors - bookings are weak), will banks continue to grow credit, or, will they pull back? The sub-prime market is hurting and logic would suggest that the subprime default and delinquency contagion will spread. What the policy response will be is anybody’s guess, although I expect that Trump will mail out stimulus checks before summer. I wish we would end the handouts and the deficit spending, but we have not had fiscally serious people in Washington for many years now.