There’s monetary policy and fiscal policy. Monetary policy is set by central banks, which try to influence interest rates and the money supply by buying and selling bonds.
Fiscal policy is spending policy, with funds appropriated by Congress, from other government agencies.
This year, lowered interest rates and expanded money supply have powered stocks from the 2020 low on March 23. The Federal Reserve has made it clear it will provide as much stimulus for the economy as possible. And the benchmark lending rate is almost at 0%, with the Fed currently not explicitly willing to move to negative interest rates.
This leaves monetary policy unable to provide much more economic and market upside, yet it’s crucial.
With fiscal policy, the government has allocated checks directly to households. That was partially why the contraction in consumer spending slowed down at the end of April and why consumer spending increased in May.
Of note, some of the lowest-income workers who lost their jobs in the pandemic are actually bringing in more money with stimulus checks and unemployment payments from the CARES Act than they were when they were working. This money was supposed to provide a bridge to when economies reopened and jobs came back (even if they come back slowly).
But recently, there has been another surge in virus cases and states may have to lockdown again. And the Fed will keep pumping money through the financial system, but it can only add so much more stimulus.
If another round of layoffs ensue, Congress may have to appropriate more money to be sent to households to keep them afloat for another period.
But Congress is composed of politicians, some of which may be hesitant to keep spending.
To learn more about fiscal policy, watch the quick video above.