DEUTSCHE BANK: The New Estimates For The US Budget Are A Total Gamechanger For Fiscal And Monetary Policy

Bloomberg via YouTubeThe CBO said this week that America’s fiscal deficit will be much smaller than anyone thought, and that long term debt growth will slow by at least 3 points through the next decade.   

That’s good news right?

In his note today, Deutsche Bank’s Joe LaVorgna says there is even more than meets the eye in the report.

Specifically, the rosier CBO report means there’s now less pressure on Congress to keep the Sequester, and more breathing room for the Fed.

He writes:

Oftentimes, a mid-year CBO update is not particularly newsworthy, but we believe this time is different for several reasons:

One, the improving fiscal finances increase the probability that the recent budget sequester will be watered down.

Two, with less fiscal drag likely in train, the Fed at the margin will feel less compelled to pursue quantitative easing (QE) at its current $85 billion per month pace. Remember that when QE was implemented last September, it was done in part in anticipation of the non- negligible chance the US economy went over a fiscal cliff. Ultimately, it could turn out to look more like a fiscal gully.

Three, declining Treasury financing needs essentially make current QE more expansionary in the sense that the Fed is absorbing even more fixed income supply relative to what was the case when projected budget deficits were much higher.

Less fiscal drag coupled with a dramatic reduction in the Treasury’s borrowing needs arguably alter the cost-benefit analysis of QE. The question is whether the doves on the FOMC acknowledge this over the next couple of months.

Somewhere between David Tepper and Jon Hilsenrath, there we shall be.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.