One of the many drawbacks of the regime shift from monetary policy dominance to fiscal policy dominance is that we now have to listen to what our politicians are saying. In a world dominated by monetary policy, financial market participants hang on every word and parse every sentence uttered by the central bankers. While statements by fiscal policymakers still mattered during this past regime, they tended to matter far less than what the Fed had to say.
In today’s fiscal policy economy, central bankers are being forced to take their cues from fiscal policymakers—what the fiscal policymakers say is suddenly a lot more important and has taken precedence over any monetary policymaker statement. A recent example of this would be the attention given by the market to President Trump’s use of the word “flexibility” this past week when discussing his approach to tariffs, as well as any other hints that he might be less strict on their imposition—particularly with the April 2 “Liberation Day” fast approaching.
In this Economics Weekly, we again examine the tariff question, but home in on how it relates to the market’s next major hurdle, which is extending the 2017 tax cuts, and the ultimate goal of all these changes, which is to bring down debt and restore confidence in U.S. public finances.