More success than regime change

The ongoing fiscal reflation is possible and bullish in isolation because it does not implicate the Fed, not because it requires coordination with the Fed.  It is probably worth resisting the macro poets on the street who are adamantly committed to getting that 180 degrees backward, even though coordination does have a bullish ring to it at the outset.

This report attempts to achieve two things.  First, it puts the just-passed fiscal legislation as well as the proposed upsizing in the context of a policy template I have been pushing. Within its own limited sphere, this template has been quite predictive, especially when contrasted with some of the kooky speculations that occasionally wash across Wall Street.

Second, it imports careful analysis from the Committee for a Responsible Federal Budget (CRFB) to provide authority behind calculations I have done on a more back-of-the-envelope basis.  The upshot is that there would have been sufficient personal income to sustain the economic expansion, at a moderate pace, beyond the Covid soft spot, even without additional legislation.  Fiscal policy would have been a headwind, not a cliff.  Of course, that assertion will now not be tested.

With the legislation, there is plenty of income to sustain strong growth, particularly on a sequential basis early next year.  If the Senate were to endorse what the House has just passed, then we might be facing a boomlet, although probably not an overheating.

What we can say with some confidence, is that the expansion is still on and that the Fed would let strong growth rip, were it to arrive.  There is no new regime, really, on the monetary side. But it is important that the Fed has helpfully committed not to wasting good luck, should it arrive.