The Need for Fiscal Measures: Ensuring a Soft Landing

Piper Sandler’s chief global economist, Nancy Lazar, emphasizes the necessity of fiscal measures to facilitate a soft landing for the US economy, warning of potential challenges in the absence of traditional growth drivers.

Historical Precedents and Present Challenges

Lazar highlights three instances in history when the US achieved a soft landing: 1967, 1985, and 1995. However, she notes that key factors contributing to these successes, such as relaxed commercial-bank lending standards and growing corporate revenues, are currently lacking.

The Role of Fiscal Stimulus

With conventional economic boosters unable to sustain growth, Lazar contends that government intervention is imperative. She advocates for fiscal measures like student-loan forgiveness, funding initiatives such as the CHIPS Act, and proposed tax cuts to stimulate economic activity.

Potential Impact on GDP

Lazar predicts that such fiscal stimulus could contribute significantly to GDP, estimating a potential boost of 1.5%. This forecast contrasts with Piper Sandler’s initial projection of a 1% contraction, suggesting a potential shift towards a 0.5% expansion.

Challenges and Risks

However, there are concerns regarding the Federal Reserve’s ability to respond effectively to a robust economic environment bolstered by fiscal measures. Lazar cites the example of 1967 when strong economic performance limited the Fed’s capacity to implement rate cuts, potentially setting the stage for subsequent inflationary pressures.

Cautionary Tale

Lazar warns of the risks associated with implementing fiscal stimulus in conjunction with monetary easing, drawing parallels to the inflationary cycle that followed the late-1960s boom. She underscores the importance of avoiding policy missteps to prevent a recurrence of past economic challenges.

In conclusion, Lazar’s insights underscore the critical role of fiscal measures in navigating the current economic landscape and emphasize the need for careful coordination between fiscal and monetary policies to achieve sustainable growth and stability.