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5 settembre 2023

US fiscal profligacy: How much to worry?

In breve

The unexpected decision by Fitch to cut the US government top rating to AA+ brought the US’ challenging fiscal outlook top of mind. Fiscal policy is highly procyclical Despite unemployment close to record lows, the fiscal deficit soared to 8.6% in Q2 (12 mth. rolling basis), doubling from the same period last year and reaching levels only seen during the Great Financial Crisis over the past decades.

Highlights:

After the last-minute deal on the US debt ceiling in May, the recent downgrade by Fitch and a larger-than-expected bond issuance have brought US fiscal concerns back into the spotlight.
The US fiscal deficit has soared to 8.6% of GDP, adding to US growth resilience but undermining the Fed’s inflation fight. A polarised Congress and the 2024 elections will prevent a meaningful policy shift. We expect federal debt to rise from just below 100% to 113% of GDP by 2033, only slightly below CBO estimates.
The “exorbitant privilege” of issuing debt in a reserve currency will ensure a high US rating for longer despite worrying fiscal metrics, with a poor handling of future debt ceiling extensions the most prominent risk.
High Treasury net supply will decline only slowly, raising the term premium somewhat further. Yet the yield impact will be largely outweighed by economic and key rate developments

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US fiscal profligacy: How much to worry?

5 settembre 2023

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