Past Decade of Rate Cuts May Be Tapped Out -- Will the Next Decade Bring More Fiscal Stimulus?

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The Federal Reserve did what it was expected to do Wednesday: hold rates steady, as it said it would do in October. Now, some economic and investment experts are starting to wonder if a fading effect of low rates calls for fiscal stimulus worldwide.

Low interest rates have been partly responsible for the economic expansion in the U.S. and many European Union economies since the end of the 2009 Great Recession. Stocks in turn have been supported by low rates.

The first leg of this year's 25% gain in the S&P 500 was driven by a Fed policy correction, in which the agency reversed its rate-hiking course and cut rates several times. 

But the past decade has seen anemic growth, with U.S. GDP touching 4% only for a month in late 2018 and inflation rarely edging past 2%. 

Inflation has tracked at roughly 1.6% in the U.S, with the 10-year treasury currently at just 1.9% and the federal funds rate at around 1.6%.

“The last 10 years have been very aggressive — we've seen the Fed and central banks around the world delve into unconventional monetary policy,” Danielle DiMartino Booth, founder of Quill Intelligence and former adviser to the president of the Dallas Fed, told TheStreet. 

“All of this trying to stimulate growth, and yet growth has been fairly sclerotic throughout this entire period.”

Booth added: “Central banks are exhausting their toolkit,” a partial reference to the European Central Bank's current negative interest rate policy. “The onus will therefore pass over to the fiscal authorities. There will be more calls for fiscal relief.”

Others agree. For growth to return worldwide, “you’d have to see monetary policy transition to fiscal policy, and that’s gonna be the economic management tool of the next decade,” Brad McMillan, chief investment officer at Commonwealth Financial Network, told TheStreet.

One of the problems with fiscal stimulus in the U.S. is the federal deficit of more than $1 trillion (just under 20% of U.S. GDP). 

“How much is the world going to give you latitude as a sovereign borrower, as the U.S. treasury to continues to build up this massive debt pile that we've got as a country?” Booth wondered. 

She also noted that there can be only so many tax cuts for a time period, as governments -- especially the U.S. government -- need to maintain healthy revenue streams.

For now, the U.S. and China financial markets just saw a piece of news that makes any kind of financial stimulus less necessary. 

The U.S. and China have reportedly agreed to a phase one trade deal. The news helped send the S&P 500 up 0.86% Thursday.