What's next for monetary and fiscal policy?

We analyze the future of economic stimulus, and what it could mean for investors.

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Mark Haefele
Chief Investment Officer, UBS Global Wealth Management

When asked whether “helicopter money” would be helpful in stimulating the European economy, ECB President Mario Draghi mentioned that “giving money to people, in whatever form, [is] a fiscal policy task, it’s not a monetary policy,” before adding that “it’s high time, I think, for the fiscal policy to take charge.” But while central bankers might judge it time for fiscal policy to take charge, we believe it will likely be left, once again, to monetary policy to fight the current slowdown. And while we believe central bank easing in the months ahead will likely help the US and Eurozone avoid recession, we remain skeptical that central banks have sufficient firepower to drive meaningful market gains in the absence of a trade agreement.

What is “helicopter money”?

Helicopter money, a phrase first coined by Milton Friedman in 1969, refers to a theoretical and unconventional monetary policy in which central banks deliver money directly to individuals. While the original reference made within Friedman’s parable illustrated a helicopter dropping money from the sky, in modern practice this could also refer to extreme practices such as central-bank financed tax cuts.

Prospects for fiscal policy

Whether governments should or can afford to spend more money is ultimately a political question. As investors, we need to understand the current political philosophy of those leading the major economies, interpret what that philosophy means for the likelihood of fiscal stimulus, and consider whether upcoming events might alter that philosophy or governments’ reaction function. With this in mind, we see the prospects of near-term fiscal stimulus as low in the world’s major economies:

Germany

Germany has the capacity to enact fiscal stimulus, but it appears willing to do so only after an economic crisis materializes.

US

A split US Congress, meanwhile, is likely to block any large stimulus measures ahead of next year’s US presidential election.

China

While China has both the means and the will to use fiscal policy, it is likely only to pursue modest stimulus in this cycle, given its desire to constrain debt growth.

Prospects for monetary policy

Central banks have not just talked about the need for more governmental policy to support growth, they have taken action. In the past month, eight major central banks have cut rates. But while central banks are trying to use the tools at their disposal to stimulate the economy at a time of slowing growth and muted inflation, they are having to tread carefully to reduce the risk of unintended consequences. And with rates already so low, the effectiveness of their toolkit is questionable. It may require a resolution to the trade conflict to unlock some of the positive economic effects of their monetary policy.

Asset allocation

With most countries lacking the willingness to embark on a more substantial fiscal drive, and the efficacy of monetary policy under question, the probability of stimulus fueling meaningful medium-term market gains seems lower than usual. But if growth were to slow further, monetary easing, and the possibility of reactive fiscal policy do reduce the chance of corporate stress. We position for this tactical environment by modestly underweighting equities, and favoring certain income-generating strategies.

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