NEW YORK, SEPTEMBER 25 (Bloomberg): The Federal Reserve is inclined to raise interest rates higher than otherwise if the next president pursues a more stimulative fiscal policy.
U.S. central bankers say they would welcome such a step as shifting some onus for supporting the economy away from the Fed. But they suggest they would offset the extra demand that a bigger budget deficit would spur by making monetary policy less stimulative.
The reason: With the economy already operating close to capacity, it’s not in need of an added boost right now.
“If we have more expansionary fiscal policy, we don’t need as expansionary a monetary policy,” Federal Reserve Bank of Boston President Eric Rosengren said in an Oct. 15 interview.
That sort of hand-off from monetary to fiscal policy could prove troublesome for financial markets that “have been both sedated and seduced by the prospect of low rates for longer,” said Joachim Fels, global economic adviser at Pacific Investment Management Co.
It also could pose some political problems for the Fed if it was perceived by lawmakers as working at cross-purposes with their efforts to spur economic growth.