Monetary stimulus broke records this year as the Federal Reserve launched infinite quantitative easing, but in a low interest rate environment, monetary policy is less important than fiscal policy in determining asset prices, said Lyn Alden, founder of Lyn Alden Investment Strategy.
The last time the federal deficit as a percentage of gross domestic product was this high was in World War 2 in the 1940s, a rapid increase in inflation followed, albeit not immediately.
The impact of fiscal stimulus on the economy becomes more prominent when central banks experience limited monetary policy options, Alden said.
“Once those rates hit the zero bound, [the Fed’s] tools are pretty much extended by that point. They don’t really have a ton left on their own to do, whereas fiscal authorities still have a lot of capacity to do things, and so that’s generally the relationship we see play out over time which is that when monetary policy runs out of ammo, that’s when we usually see more fiscal spending,” she said.
Inflation is not expected to hit the economy in the short-term, Alden said, noting that the timing of fiscal stimulus is important.
Source: David Lin | Kitco News
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