Unequivocally Good Budget Deal Gives Fed Flexibility

Unequivocally Good Budget Deal Gives Fed Flexibility
CATEGORIES: Viewpoints

Unequivocally Good Budget Deal Gives Fed Flexibility

After years of partisan showdowns and eleventh hour drama over fiscal issues, the budget bill that President Obama signed into law yesterday represents a welcome change. It raises the debt ceiling well into 2017, thereby taking the possibility of future manufactured debt limit crises off the table for the time being, but furthermore it represents a turning point for U.S. fiscal policy. This is positive for the economy and gives the Fed more flexibility for a potential liftoff.

The budget deal achieves three important things:

  • It suspends the enforcement of the debt ceiling until March 2017, at which point Treasury will be able to use extraordinary measures, which in practice pushes the real debt ceiling deadline even further into 2017.
  • It authorizes top-line spending levels for fiscal year 2016 and fiscal year 2017, which represent an increase in government spending of $80 billion over two years.
  • It pays for the spending increases by cutting future spending and selling off certain government assets.

This is good news all around. For the markets, it takes the prospect of default and compromising the sacrosanct full faith and credit of the U.S. off the table. For the economy, it represents a boost to GDP of about 0.25% in 2016, which will be the most significant increase in federal government spending we have seen in five years. And, for the Federal Reserve, it not only provides clarity around fiscal policy for the next two years, but given the slight fiscal stimulus, it allows the Fed more flexibility to get off the zero rate should they believe the data warrant it.

While this budget deal is significant and overwhelmingly positive, we should not extrapolate too much from it: It (sadly) does not likely presage a new way of getting things done in Washington. We should still expect to see brinkmanship and partisan standoffs – and the next real test could come too soon, in December, when Congress has to pass a series of funding bills to keep the government from shutting down.

But for now, let’s enjoy the fact that Washington did something unequivocally good for markets and for the economy.



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