Monetary, Fiscal Initiatives Push US Markets To All-Time High

Monetary and fiscal measures are in full throttle in the US to revive the world's largest economy. The latest US budget figures indicate that the government is on its way to trim the fiscal deficit. On the monetary front, the country’s apex bank, the Federal Reserve (Fed), though divided in opinion, will most likely continue with the current USD 85 billion per month bond buying programme.

The recent minutes of meeting of the Federal Open Market Committee (FOMC) released yesterday (April 10, 2013) indicate that the Fed members are not quite in agreement on the bond buying programme. Some members want to end the bond buying immediately, while others want to wait till the end of the year. A few others want to taper out the bond buying and bring it to an end only if the labour market conditions improve by the end of the year.

The Fed members have only seen the employment figures in February, as the Fed's meeting took place on March 19-20. The March payroll data which came in April indicates that the US economy added only 88000 jobs against 200000 as expected by economists. Apart from the weak pace of job creation, the labour market conditions which are not showing any significant improvement may limit the Fed from taking any decision to end the current program. In such a case, more debt may have to be added to the country’s already swollen balance sheet.

The Fed has been keeping the interest rates at lower levels to improve the labour market conditions. In view of the fact that there has been no significant change in the employment numbers, the Fed may have to retain the interest rates at these levels and continue with its buying programme.

On the fiscal front, in January 2013 the US government increased the social security taxes as well as income tax on wealthy Americans. The economy now seems to be on a path to report fiscal deficit below USD 1 trillion for the first time in 5 years.

In the first 6 months of the current budget year (October 1, 2012 to September 30, 2013), the budget deficit has touched USD 600 billion, which is lower than USD 779 billion reported in the first 6 months of the 2012 budget year. In March 2013, the deficit grew by USD 106.5 billion as compared to USD 203.5 billion in February, indicating a slower growth in the fiscal deficit. The fiscal deficit forecast for the 2013 budget year are at USD 973 billion, down 11% from the fiscal deficit of USD 1.1 trillion reported in the 2012 budget year. This decline in the fiscal deficit was due to the 12% higher tax receipts as well as a 3% decline in spending. Higher social security taxes and lower expenditure on emergency funds are the main reasons behind the improvement.

The government has proposed to take the deficit further down to USD 744 billion of 4.4% of the GDP by 2014 and to 2.8% of GDP in 2016. In what is clearly a positive response to the measures taken by the government, the equity markets in USA have also seen a consistent rise.

The bond buying programme will most likely continue as there is no general agreement between the FOMC members. This means that the liquidity in the global markets will remain intact at least till the end of the year. The only question is, which markets will attract this liquidity?