US fiscal policy is easing aggressively pro-cyclically – BBH

Analysts at BBH suggest that avoiding the politically-charged rhetoric like the plague, US fiscal policy is easing aggressively pro-cyclically.  That is to say, stimulus is being added while the US economy is already expanding at a pace that appears somewhat above trend, they further add.  

Key Quotes

“Rather than follow up the tax cuts with spending reform, the US has now lifted the spending caps on both defense and non-defense spending by a little more than $200 bln over the next two years and provides an additional $90 bln for disaster relief.  On top of these, the new infrastructure initiative is expected to be unveiled in the coming days.”

“The US Treasury issuance was set to at least double this year.  One of its largest buyers, the Federal Reserve, has already announced it would be buying $420 bln less than last year.  The cost of hedging and reserve management decisions may also deter other buyers, which might not be offset by demand from oil exporters.  Without exaggerating the significance, last week's quarterly refunding, which took place while immersed in the echo-chamber, saw a lukewarm reception, at best.”

“The lifting of the debt ceiling will allow the US Treasury to issue $300-$400 bln of T-bills, replenishing what was drawn down to stay within the cap.  The dollars sloshing around the plumbing of the international capital markets will be reduced.  The cross-currency swap market should show the greater premium will be paid to secure dollar funding.   We have anticipated that this would be a dollar-positive development in the spot market, though the relationship is not always straightforward.”