Mainstream economics uses a fairly simple equation when it comes to public policy: More government spending equals more growth, which is just about always a good thing.
The problem is with the “just about always” part. At the bottom of recessions, tax cuts and higher government spending can indeed stop the shrinkage and get things going again. And fiscal stimulus might be relatively harmless when an economy has minimal debt and can, therefore, handle a bit of deficit spending without negative side effects.
But this is not one of those times. Eight years into a recovery, with unemployment and interest rates at near-record lows and global debt at record highs (by a wide margin), borrowing a ton of new money virtually guarantees rising inflation and shortages of everything from trained workers to copper and zinc. To which the Fed is pretty much required to react:
Spending Bill Raises Expectations for More Fed Rate Increases
(Wall Street Journal) – A bipartisan spending deal reached by U.S. lawmakers earlier this month has prompted many Wall Street economists to raise their projections of how much the Federal Reserve will raise interest rates this year and next.
More forecasters say they now expect four Fed rate increases this year, up from three, because of the deal to increase federal government spending by $300 billion over the next two years.
The funding bill is more generous than many economists anticipated, and they predict it could boost U.S. economic growth in 2018 and ’19 by around 0.3 percentage points each year—roughly the same size increase expected from the $1.5 trillion tax cut signed into law by President Donald Trump in December.
Economists at UBS Group AG , Nomura Securities and Oxford Economics in the past week raised their projections for rate increases, joining other prominent forecasting shops that had already projected four quarter-percentage-point increases in the Fed’s benchmark short-term interest rate this year.
Nomura sees the Fed raising rates four times this year and twice next year, adding one more additional rate rise to its forecast in both years. UBS also added one rate increase to its forecast each year, now expecting the Fed to raise rates four times this year and three next year.
Economists at Goldman Sachs Group Inc. and JPMorgan Chase & Co., which were among those already projecting four rate rises this year, have said the government spending package makes them more confident in those calls.