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Are we transitioning to an economy dominated by monetary policy to fiscal policy?

09 February 2021

By François Rimeu, Senior Strategist, La Française AM

The support offered by central banks since the 2008 crisis has been tremendous. 

It all began in November of 2008 when the US Federal Reserve introduced quantitative easing. Since then, central banks across the globe (European Central Bank, Bank of England, Bank of Japan, etc.)  have launched a series quantitative easing polices of various sizes (QE 2, QE 3…), implemented on a variety of financial assets (Government bonds, corporate bonds, Equities…). Without the monetary support offered by central banks, no one knows how the 2008 or 2011 crises would have evolved. Quantitative easing certainly has flaws, but it has allowed some developed countries to run fiscal deficits without fearing a spike in their long-term interest rates.

It has been clear for some time that monetary policy has accomplished everything it could. No further large-scale purchases will make a significant difference. The European Central bank has been saying this for years and more recently, so has the US Federal Reserve. 
Now is the time for fiscal intervention. Actually, it was already the case before the Covid-19 crisis, but it is even more true now. 

In the coming years, we will probably witness central banks maintaining their lose policy stances and governments running higher fiscal deficits. Before the Covid-19 crisis, governments were somewhat reluctant to run very large fiscal deficits, fearing inflation or a potential inability to repay their debt. Those reasons do not appear to be valid anymore, with inflation below target for the past several years and central banks adjusting their bond-buying programs to adapt to new bond issuance. 

More importantly, in the current environment, it would be political suicide for any party to pledge a reduction in fiscal spending. Unemployment is high and rising, services businesses are still negatively impacted by the pandemic and uncertainty remains very high. This is not the time to reduce fiscal spending, the population would not understand it, and it could eventually lead to social turmoil, which would be very difficult to handle in the current situation.  
As of now, nobody knows to what extent we can limit fiscal stimulus. Until we have the answer, loose fiscal policy will continue.

Disclaimer
This commentary is intended for non-professional investors within the meaning of MiFID II. It is provided for informational and educational purposes only and is not intended to serve as a forecast, research product or investment advice and should not be construed as such. It may not constitute investment advice or an offer, invitation or recommendation to invest in particular investments or to adopt any investment strategy. Past performance is not indicative of future performance. The opinions expressed by La Française Group are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Published by La Française AM Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française. La Française Asset Management was approved by the AMF under no. GP97076 on 1 July 1997.

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