By Mike Dolan
LONDON- Markets may be missing the mix.
As financial markets parse monetary policy tea leaves by the hour and remain in thrall to the twists and turns of major central banks, some argue investors are missing the broader economic policy picture shaping the years ahead.
One of the main themes of the decade before the pandemic was that western governments were overly reliant on their central banks for economic support – preferring a policy mix that kept budget strings relatively tight while real interest rates sunk ever lower to prop demand and fend off deflation.
In the space of two years after COVID-19 hit, all that seemed to get turned on its head.
Governments bust the bank to keep economies afloat through lockdowns, deficits and debt levels soared and central banks effectively underwrote the additional borrowing required with zero rates and bond buying.
But as growth, employment and inflation have come roaring back, the reversal of interest rate cuts now underway questions just how much fiscal firepower will now be left longer term – not least if those borrowing rates remain higher for longer and economies stall again quickly.
Last week the non-partisan US Congressional Budget Office unveiled what appeared at first like a dramatic repair of the national accounts to pre-pandemic level.
Thanks in part to surging tax revenues as the US economy re-opens, the CBO said this year’s national budget deficit would shrink by more than $1.7 trillion compared with 2021, plummeting to 3.9 percent of gross domestic product from an eye-popping 12.4 percent last year and then further down to 3.7 percent in 2023.
A welcome metric at least for the Treasury bond market that’s braced this week for the Federal Reserve to start running down its bloated balance sheet of US debt holdings accumulated during the pandemic.
But the CBO’s 2022 surprise barely masked a deterioration in the fiscal picture over the coming decade due to recurring spending already agreed – and also the rising interest bill.
It now expects the cumulative budget deficit in the 10 years to 2031 to rise by another $2.4 trillion compared with last July’s forecast to $14.5 trillion.
And interest expenses on the federal debt were expected to more than double to 3.3 percent of GDP by 2032, lifting debt/GDP ratios to a record 110 percent alongside an average interest rate of 3.1 percent compared with 98 percent this year on an average rate of 1.9 percent. – Reuters
