Assessing the budget deal: Part I

The just concluded budget deal blows out the deficit dramatically, particularly when taken in conjunction with the recent tax cuts.  But that is not the main issue.

The main issue is that the spending increase adds to aggregate demand growth at a time of full employment and monetary tightening.  The odds are that the Fed will have to engineer an additional tightening of financial conditions – beyond that already implied by the prior baseline – in order to offset it.

A big surge of Treasury supply is coming. That too is not positive, although probably distantly secondary relative to the more basic issue of aggregate demand growth needing to be rationed down. FH-180211