The Big Shift: From Monetary to Fiscal Policy

Abstract

This research note investigates why Congress is likely to gain importance with respect to financial market price impacts, relative to monetary policy. Economic theory that claims the primary constraint on government spending is inflation, rather than deficits, has rapidly moved into Overton window, freeing up fiscal policy to have nearly unlimited firepower for tackling underemployment, inequality, climate change, and healthcare. There's a potential Blue Wave eager to address social, economic, and environmental issues through sweeping legislation and rule-making. There's less room left to advance monetary policy, given actions taken already. There are practically infinite levers to pull through new legislation and regulation – this is not the case with the blunt instrument of monetary policy. Proposed policies have specific sets of winners and losers, which leads to more dispersion in prices across companies, relative to the blunter monetary policy tools. This is even more pronounced with Democratic proposals. Within-day-within-sector spread between winner and loser public companies is larger with Democratic proposed policies over the past 6 years of data. More fiscal policy (and especially more of it coming from Democrats) could lead to more policy-driven winners and losers in the public markets.