The dynamics of US monetary policy are going to be under the spotlight amidst President-elect Donald Trump's pick for Treasury Secretary, Scott Bessent, and the upcoming meeting of the Federal Open Market Committee setting the stage for what may be significant economic shifts. Given fiscal conservatism at the forefront of Bessent's agenda and persistence in inflationary pressures, the coordination between fiscal and monetary policy is going to hold the key going forward.
Key Takeaways
The appointment of Scott Bessent to the position of Treasury Secretary is representative of a shift toward fiscal conservatism that can have serious impacts on monetary policy.
The FOMC meeting would focus on inflation management and rate cuts, hence cautious easing is expected.
Markets are responding to the shifting fiscal-monetary dynamic; bond yields and the USD are reflecting heightened uncertainty.
Trump's Monetary Policy: Change of Guard with Scott Bessent
The choice of Scott Bessent by President-elect Trump to take over as Secretary of the Treasury has sent shockwaves in the financial markets. Conventional-thinking Bessent is soon going to usher in a significant shift towards trimming federal spending. This move aligns with Trump's overall perception of bringing down deficits and preventing government borrowing.
Bessent has publicly made it known that he is for fiscal discipline in his bid to prevent wasteful spending. His prestige as an accomplished fund manager lends credence to his position; the problem is that his stance may be at variance with the dovish tendencies of the Federal Reserve. "In arguing for less federal borrowing, Bessent could reduce the fiscal stimuli available to counter slowdowns.".
Société Générale market strategist Stephen Spratt said that Bessent's appointment is seen as a "safe hands" decision. "His hawkish stand would thus rein in the federal government's expenditure without eroding market stability," Spratt said. But beyond this, there are questions on the compatibility of Trump's economic goals with the Federal Reserve's objectives for the longer period.
FOMC Policy Meeting : Expected Policy Moves
Attention shifts to the Federal Reserve's next FOMC meeting, where policymakers will seek to try and resolve a number of pressing issues, including inflation and interest rates. The Fed has given indications of a go-slow approach, with Chair Jerome Powell underscoring cautious easing amid resilience of inflation.
Market expectations of a December rate cut have chilled, with the likelihood of a 25-basis-point reduction at just over 50%, according to the CME FedWatch Tool. The Fed's preferred measure of inflation-the personal consumption expenditures price index-is projected to rise 0.3% on a month-over-month basis, which would suggest continued upward pressure on prices.
Minutes from the Fed's November meeting will be scrutinized for insight into internal deliberations, especially regarding the delicate balance between controlling inflation and maintaining economic growth.
The fiscal approach by Bessent and his role in shaping monetary policy:
Bessent is coming in at a sensitive time when the Fed is trying to keep a tight leash on inflation without thwarting growth prospects. His advocacy for cuts in federal spending would limit the fiscal space for stimulation.
For instance, Bessent's guidance likely will mean greater scrutiny of federal borrowing, which could restrain large infrastructure projects or other types of government spending aimed at stimulating demand. In that way, such conservatism could put more pressure on the Fed to use its monetary tool kit to keep growth going-long rate cuts.
But this also is a dynamic that potentially creates friction between fiscal and monetary policy. The Fed may balk at aggressive rate cuts if fiscal tightening is perceived to be too abrupt, potentially slowing economic momentum.
Market Reactions to Trump's Monetary Policy and the FOMC
The interaction of Trump's monetary policy with the Fed's decisions to come has already begun pushing the financial markets to act accordingly. The US Treasury yields plunged after the announcement of Bessent's appointment, with the 10-year benchmark falling over 1.5% to 4.35%. The decline has suggested that investors view Bessent as fiscal moderate and also rein in some expectations of rate increases.
The USD Index, a gauge of the greenback's relative strength against a basket of its main rivals, shed 0.55% to 106.90 and gave up recently-made gains. Analysts attributed this performance to profit taking and speculation about what the FOMC would deliver.
Stocks are faring quite well due to growing expectations of a more predictable fiscal environment under Bessent's guidance. U.S. stock index futures were higher by between 0.4% and 0.6%, reflecting improved sentiment.
Inflation and Interest Rate Outlook for 2024
The direction of rates in the US will be seen after the inflation print is followed by the durable goods orders and finally by the PCE index later that week. Inflationary pressures are set to spill over into 2024 on resilient consumer spending and still-tight labor markets, analysts said.
The Fed's cautious approach to rate cuts implies a gradual easing-in without compromising the twin objectives of price stability and growth. However, with Bessent guiding Trump's monetary policy, this may be complex.
Balancing Fiscal Discipline and Growth Priorities
The promise of reducing federal spending with Trump, while at the same time stimulating activity, is contradictory. A reduction of $2 trillion to the deficit would involve huge cuts in discretionary spending, entitlements, or defense budgets-all politically sensitive areas.
Bessent might shuffle resources around rather than making any dramatic cuts, a more pragmatic approach wholly in keeping with his fiscal philosophy. Meanwhile, if Trump is to get anywhere near his ambitious economic targets, far closer cooperation between the Treasury and the Fed will be needed.
What's Next for Markets? Immediate and Long-term Projections
In the short term, markets will closely follow the outcome of the FOMC meeting and the release of the PCE index. A dovish tone by the Fed could give some relief to equities and further deflation to the USD. Conversely, stronger-than-expected inflation might fire up talks of tighter monetary policy.
Going forward, monetary policy under Bessent's tutelage from Trump will probably change the fiscal-monetary paradigm. Greater fiscal discipline could make the economy more stable in the longer term, while also introducing some volatility as markets adjust to the less-accommodative environment.
Comentarios