US: What should we expect from extensive stimulus at full employment? - Natixis

There will now be extensive stimulus in the United States with corporate tax cuts, wealth effects linked to the value of equities, low long-term interest rates and renewed depreciation of the dollar, at a time when the US economy is definitely very close to full employment, notes Patrick Artus, Research Analyst at Natixis.

Key Quotes

“The risks associated with this policy are obvious:

• It may have practically no effects on growth, but may only increase the US external deficit;
• It may drive the Federal Reserve to accelerate the increase in the Fed Funds rate even if inflationary pressures remain weak.”

“Generally speaking, conducting a highly procyclical economic policy cannot be effective.”

“Conclusion: A highly procyclical economic policy is inevitably ineffective

• It is difficult to understand why the United States is implementing an overall highly stimulatory economic policy at full employment given the associated risks (limited effect on growth, deterioration in foreign trade, accelerated increase in the Federal Reserve’s interest rates).
• An economic policy should normally not be procyclical. Perhaps the Trump administration believes that the potential for an upturn in the participation rate or labour productivity is significant which, as we have seen, we believe is very unlikely.”