Fluctuations in uncertainty can influence economic outlook by shaping the behavior of economic agents.
For example, given there are costs to businesses for reversing investment or hiring decisions, they have an incentive to delay making these decisions when facing a high level of uncertainty. Likewise, increased uncertainty can cause households to raise precautionary savings and postpone purchases of big ticket items.
Following the 2020 elections, US economic policy uncertainty fell sharply for 4 straight months. With the Democrats gaining effective control of Congress, the consensus on Wall Street and inside corporate board rooms was that the Biden administration had a free hand to deliver its campaign promises. This reduced perceived policy uncertainty gave a boost to the economy and to financial markets.
The post-election honeymoon seems to be over, however.
Monetary Policy : with inflation climbing to a 13-year high, the Fed’s commitment to keeping interest rates low has become less credible.
Fiscal policy: a ruling by the Senate Parliamentarian on June 2 that leaves the Democrats with only one more automatic budget reconciliation this year is introducing uncertainty over which part of the Democrats' sprawling agenda will become reality.
Trade policy: US-China relationship has arguably deteriorated further under Biden. Not surprisingly, economic policy uncertainty rose in May for the first time in 5 months (see above Chart). In June it went down slightly but it was still higher than the level in April.
The Democrats easily pushed through Biden’s American Rescue Plan. The next in line are the American Jobs Plan and the American Families Plan. With the administration increasingly forced to juggle between the progressive wing of the party and moderate Republicans, and with Trump returning to the political limelight, my working assumption is that economic policy uncertainty is more likely to be a headwind than tailwind for US economy in the rest of 2021. It goes without saying that the results of the Arizona audit which should be out soon potentially could have an outsized effect on policy uncertainty.
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