Hoisington Investment Management

Amidst a widespread deterioration in the economic landscape, it is crucial to underscore the current detrimental roles of monetary and fiscal policy.

The dynamics of fiscal and monetary policy are now entering a new phase. Due to the emergence of negative Net National Saving (NNS), the law of diminishing returns can no longer fully capture the harmful effect of debt on economic growth.

In 2023, the Federal budget deficit exceeded private and foreign saving, resulting in only the eighth year since 1929 with negative net national saving (to be referred to as NNNS).

The long history of business cycles illustrates that rising inflation precedes recessions. Inflation accelerations don’t just happen, they are caused.

Monetary and fiscal indicators continued to tighten significantly in the second quarter pointing towards a material slowdown in the U.S. economy.

The Fed’s most pressing concerns are to not only reverse its monetary excess and misjudgment of inflation, but also to instill confidence that they will follow important provisions of the Federal Reserve Acts.

Disaster is a strong but appropriate word that applies perfectly to the state of U.S. monetary policy.

Real Treasury bond yields fell into deeply negative territory in 2021.

Nearly nine years into the current economic expansion Federal Reserve policy actions appear to be benign, as even after six increases, the federal funds rate remains less than 2%. Changes in the reserve, monetary and credit aggregates, which have always been the most important Fed levers both theoretically and empirically, indicate however that central bank policy has turned highly restrictive.

Optimism is pervasive regarding U.S. economic growth in 2018. Based on the solid 3%+ growth rate during the last three quarters of 2017, this optimism is well-founded.

The worst economic recovery of the post-war period will continue to be restrained by a consumer sector burdened by paltry income growth, a low and falling saving rate, and an increasingly restrictive Federal Reserve policy. Additionally, with the extremely high level of U.S. government debt and deteriorating fiscal situation, the economy is unlikely to benefit from any debt-financed tax changes. Finally, from a longer-term perspective, the recent natural disasters are an additional constraint on economic growth.

“Dual mandate” is one of the most commonly used phrases in U.S. central banking. The current Chair of the Federal Reserve often mentions it in both speeches and testimony to Congress. Not surprisingly, this is an extremely hot topic in monetary economics, and execution of this mandate has profound significance.

The Federal Reserve has initiated the fifteenth tightening cycle since 1945 (Chart 1). Conspicuously, in 80% of the prior fourteen episodes, recessions followed, with outright business contractions being avoided in just three cases.

The 2016 presidential election has brought about widely anticipated changes in fiscal policy actions.

The outcome of the national election does not change our view on the trajectory of the economy for the next four to six quarters.