Despite the restrictive monetary policy, the U.S. government’s fiscal policy remains very expansionary. In the Corona year, the federal budget deficit was 14.9 % of GDP.
This fell to 11.9 % in 2021 and was still a high 5.4 % of GDP in 2022. Good economic growth in the United States is driven to a not insignificant extent by high government spending, and the extent of the expansion of the government share in peacetime is unprecedented in America.
Even though the tone has changed under President Biden, the substance of economic policy is hardly different from that of President Trump. “America First” applies under Biden as well. The increasing rejection of free trade, the political and economic containment of China, and the promotion of domestic industry are the cornerstones of his economic policy. With the Infrastructure and Jobs Act, the Chips and Science Act and the Inflation Reduction Act, Biden is pursuing a dirigiste industrial policy that fundamentally contradicts the rules of the WTO. This increasing distancing from free global trade will diminish world prosperity and unleash a costly global subsidy spiral. But, at least for the time being, American industry is benefiting massively, as the numerous investment announcements in the United States suggest.
Since inflation peaked at 9.1 % in June 2022, it has fallen again surprisingly quickly to 3.2 % by July 2023. An important factor in both the rise and the fall was volatile energy prices. For example, energy prices fell by 12.5 % y/y in July, while core inflation (inflation excluding volatile energy and food prices) remained high at 4.7 %. The rapid decline in inflation rates is fueling hopes of an approaching end to the Fed’s interest rate hike cycle, which in turn has buoyed the financial markets since the beginning of the year.
In the discussion surrounding monetary policy, it should not be forgotten that real interest rates have only been moving slightly into positive territory since March of this year. In the Euro zone and Switzerland, real interest rates are still negative which means that inflation was higher than nominal interest rates in each case. This monetary policy can hardly be described as truly restrictive.
Fig. 4: Real Interest rates in the United States, the Euro zone and Switzerland
Source: raw data by S&P Global, illustration by hpo forecasting
The U.S. central bank balance is also still around twice as high as it was shortly before the pandemic. Through the extension of the central bank balance sheet alone, the U.S. economy benefits from increased liquidity in the amount of around USD 4 trillion compared to 2019. This difference is roughly equivalent to the GDP of Germany.
Overall, the economic figures for the United States are actually significantly better than expected a year ago, even if some of this is being bought with very high government spending. When crises surface, they are tackled quickly and decisively with a lot of money, such as the regional banking crisis in the spring.