The U.S. economy is on its own now, a new report from Fitch Ratings declared Wednesday.
Continue Reading Below
Monetary stimulus in the form of low interest rates and fiscal stimulus via government spending will not be the primary drivers of economic growth going forward, says the report titled Mapping a Subpar Economic Recovery: What Can History Tell Us?
Instead, the growth will likely come from what the report describes as “the wealth effect,” or improved consumer confidence as a result of a strengthening housing market and rising equity markets.
“Unlike during past recoveries, U.S. interest rates, while at supportive levels, have already been at, or near, historic lows for several years, and are potentially headed higher. Fiscal stimulus, which initially rose sharply to stimulate recovery, has declined significantly due to budgetary realities, neutralizing its role as a growth accelerant,” Fitch said in a statement that accompanied the report.
Interest rates were lowered to near-zero by the Federal Reserve in late 2008 at the height of the fiscal crisis and have been held there ever since. Pressure is now mounting on the Fed to begin raising rates to ward off potential inflation.
The Fed has strongly hinted that rates will begin rising in mid-2015 when unemployment drops to a range of 5.2% and 5.2%, what the central bank defines as maximum employment, and inflation rises nearer to the Fed’s target rate of 2%.
Fitch believes the Fed will act “gradually” to wind down its stimulus policies, however, and will “likely err on the side of growth.”
Meanwhile, a deeply divided Congress is in no mood to pass any further spending programs aimed at spurring economic growth. Indeed, sequestration, or mandated across-the-board spending cuts, has slashed government spending, a situation some economists believe has played a factor in prolonging the recovery.
“Budgetary realities have resulted in a leveling off and even a real decline in government spending, implying that fiscal policy will likely not be a growth accelerant in the near term,” the report states.
Consequently, the economy will have to rely on other factors, “mainly the wealth effect,” according to Fitch.
“The housing market recovery and the very strong equity returns experienced last year, assuming they are sustainable, could prove to be a significant positive near-term domestic growth factor,” the report states.
Fitch Ratings Report