The amount of monetary and fiscal stimulus impacting the U.S. markets is unprecedented during modern history. The debate about what to do next will be a key area of focus during the summer months.
On the monetary front, the Federal Reserve’s (Fed) zero-interest-rate policy looks to be solidly in place well into 2022, but the question of when and how much to taper the Fed’s asset purchases is starting to grow louder. The Fed is keenly aware of the “taper tantrum” that occurred when it started to ease asset purchases after the financial crisis. Still, the growing evidence of economic data points to slowing asset purchases sooner rather than later. I believe the Fed will announce a gradual slowdown in asset purchases but not until the fall months. That leaves the summer to discuss how to execute this policy change.
On the fiscal front, spending and potential tax increases will keep Washington buzzing during the summer recess. I expect the administration will try to get a bipartisan deal on core infrastructure, but the GOP will be unlikely to agree to any deal costing more than $1 trillion. That leaves the latter months of the year for Democrats to push for bills on a mostly partisan basis.
The implications for additional stimulus are significant for both fixed-income and equity markets. The summer months will see a lot of dialogue regarding both but likely little action. I expect the markets to trade in a choppy sideways pattern until a clear path emerges in the fall.
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