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US: 2016 Federal fiscal policy outlook – Wells Fargo

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 16, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    Research Team at Wells Fargo, notes that this year’s Budget and Economic Outlook, published by the US Congressional Budget Office (CBO), shows a dramatically different path for revenues and outlays.

    Key Quotes

    “The result is a rise in the federal fiscal year 2016 budget deficit relative to the size of the economy for the first time since 2009 and a debt-to-GDP ratio that rises to 86.1 percent over the next 10 years. In this report, the first of three on our 2016 Federal Fiscal Policy Outlook, we explore the economic assumptions underlying the CBO’s budget projections and compare those assumptions with our economic forecast. We then discuss the importance of the CBO’s potential GDP projections and how these estimates have changed over time. Finally, we look at a sensitivity analysis of the government’s revenues, outlays and the budget deficit in a higher interest rate environment and a slower GDP growth environment.

    We find that even with the CBO’s somewhat stronger economic growth assumptions for 2016 relative to our forecast, the federal budget remains, in the words of the agency, on a long-run “unsustainable” path under current law. Under the most recent set of economic assumptions, we find that the GDP growth rates of the CBO are faster than we are currently projecting for both 2016 and 2017. In addition, we have somewhat higher three-month interest rates and lower 10-year interest rates through 2017.

    In the long run, we have higher three-month and 10-year interest rates, but our GDP growth assumptions are largely consistent. The CBO lowered its view of long-run potential GDP growth again this year, following a pattern of consistent downward revisions over the past few years. A sensitivity analysis under a higher interest rate environment and slower GDP growth shows that the deficit would be significantly higher if interest rates were just 1 percent higher or GDP growth was 0.1 percentage points lower per year than assumed by the CBO.

    Under the most recent set of economic assumptions, we find that the CBO’s GDP growth rates are faster than what we are currently projecting for both 2016 and 2017. In addition, we have somewhat higher three-month interest rates and lower 10-year interest rates through 2017.

    In the long run, we have higher three-month and 10-year interest rates, but our GDP growth assumptions are largely consistent. The CBO lowered its view of long-run potential GDP growth again this year, following a pattern of consistent downward revisions over the past few years. A sensitivity analysis under a higher interest rate environment and slower GDP growth shows that the deficit would be significantly higher if interest rates rose by just 1 percent higher or GDP growth was 0.1 percentage points lower than assumed by the CBO. Now that we have explored the assumptions used by the CBO to develop the budget outlook, in Part II we will turn to the outlook for federal revenues and outlays.”
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