With U.S. fiscal conditions remaining more expansionary than predicted, the U.S. Federal Reserve Board’s ability to cut interest rates may be more limited than expected, says National Bank Financial Inc. (NBF).
In a research note, the bank’s economists observed that in April, the IMF forecast a significant improvement in the U.S. fiscal balance for 2024, which would have served as a drag on economic growth.
However, the latest data from the IMF reveal this hasn’t been the case.
“While some consolidation would have made sense after a pandemic period characterized by huge deficits, the IMF’s forecast turned out to be way off the mark,” NBF said.
Instead of dampening growth, government spending has been a modest contributor to it, the firm noted.
“This lack of fiscal discipline is certainly one of the main reasons that explain why U.S. growth has held up so well so far and why inflation remains slightly above the central bank’s target,” it said. “But it is also beginning to raise questions about the Fed’s ability to cut interest rates as much as investors expected a few months ago.”
These concerns are also being stoked by the electoral promises from the two major U.S. presidential candidates, who both envisage expansionary fiscal policy.
“It remains to be seen whether there will be a significant gap between the candidates’ proposals and what they will be able to get through Congress once elected, but the risk of U.S. monetary policy diverging from that of other advanced economies has certainly increased recently,” the report concluded.