Will Democrats, Trump $2 Trillion Fiscal Plan Put Fed Back on Track?

Will Democrats, Trump $2 Trillion Fiscal Plan Put Fed Back on Track?


TALKING POINTS – FED, US DOLLAR, TRUMP, DEMOCRATS, $2 TRILLION INFRASTRUCTURE SPENDING PLAN

  • Trump and Democrats proposed $2 trillion infrastructure plan
  • Ideological differences, method of financing may be roadblocks
  • Will the bill boost growth, inflation and put Fed back on track?

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On Tuesday, House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer announced a joint effort with President Donald Trump to implement a $2 trillion infrastructure spending plan. Both Trump and key Democratic members will be reconvening in three weeks to discuss what may be the biggest sticking point: how will it be financed?

This may be where common ground is undermined by a divergence in ideologically-driven preferences in implementing fiscal measures by both the Democrats and Republicans. An example of this is the former’s concern over environmental regulations and maintaining ecological integrity, while the latter is advocating for reducing the regulatory obstructions associated with green policies that may inhibit building.

The bold plan would need approval from Congress, with both parties having a stake in seeing a deal go through in light of the upcoming 2020 election. Both want to put a feather in their cap.

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The fiscal stimulus could provide a boost to economic activity which has been showing broad underlying weakness despite the recent GDP report. Since July, core inflation has been falling from its peak at 2.4 percent to its current reading at 2.0 percent. The US economy has been underperforming relative to expectations for several months now from a number of factors ranging from trade war spats to the government shutdown.

US Economic Performance

Chart Showing US Economy

Taking these factors into consideration helps explain the Fed’s dovish pivot following the rate hike rampage in 2018 where interest rates rose 100 basis points with an intent to raise rates once in 2019. Fed Chairman Jerome Powell has reiterated that the central bank will continue its patient approach until the domestic outlook becomes clearer and if underlying economic strength is sufficiently fortified to endure a rate hike.

The upcoming FOMC meeting and commentary from Fed Chairman Jerome Powell will be heavily eyed by investors with market participants expecting for the central bank to maintain its neutral stance. However, despite the Fed’s position, overnight index swaps are showing that investors believe there is a 67.0 percent chance of a rate cut by November, going against the central bank’s intent.

If the infrastructure spending plan is passed, it could boost growth and lead to job creation and help revive inflationary pressure. Consequently, Fed policymakers will be carefully watching how and if the bold spending plan will be approved by Congress. Embedded in the fiscal measure may be the key force that could put the Fed’s rate hike cycle back on track after its derailment.

FX TRADING RESOURCES

— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter





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