Governments and policy-makers have two tools to influence the quantity of money in an economy – fiscal respectively, monetary policies.
While monetary policy decisions are well-known among investors, fiscal ones have a similar, if not an even stronger impact.
Last Wednesday, the Federal Reserve of the United States decided to do nothing. However, during the press conference, the Fed’s Chair, Jerome Powell, hinted at upcoming easing from the fiscal space. Fast forward a few days, and the U.S. Congress delivered another fiscal stimulus package, designed to help the economy during the COVID-19 pandemic.
Another $900 Billion as Fiscal Support
Last weekend the U.S. Congress agreed on a new fiscal package to help deal with the coronavirus strain. It includes various measures, like supporting households demand (i.e., one-off checks of $600/individual) and extended unemployment benefits.
While the size of the fiscal stimulus is not that big as the previous one, it comes on top of the monetary policy easing set by the Fed. Never, in the history of the United States, have the financial conditions been so accommodative. If we add the fiscal ease as well, the stage is set for a strong economic rebound once the pandemic is over.
The COVID-related fiscal package is worth about $900 billion or 4.2% of the U.S. GDP (GDP – Gross Domestic Product). The agreement was voted into law yesterday and was the main reason why the financial markets, notably the U.S. stocks, bounced back.
The stock market opened with a gap lower as the futures tumbled on Monday. The news that the United Kingdom found a new variant of the virus that spreads much faster than the original one sent shivers across markets. As a consequence, the USD gained, and the stock market tanked.
By the time the cash market opened (i.e., regular trading market hours for the U.S. stock market), the Dow Jones had traded below 29,500, only to bounce for the rest of the day. In fact, it regained the 30,000 level, mostly on the good news provided by the fiscal stimulus.
It is said that monetary policy influences the money and credit in an economy. It is the preferred way to adjust the money supply to avoid excessive inflation and ensure price stability. Sometimes, though, monetary policy measures are not enough. Or, when there is a need for more, fiscal easing complements monetary easing.
2020 showed how the two work together. Their effects, however, will take time, as there is a time lag associated with such decisions.
One thing is sure, though. The United States set the stage for a strong comeback once the pandemic is over, with positive spillover effects for the global economy.