| I'm Chris Anstey, an economics editor in Boston, and today we're looking at whether the Fed will need to take account of fiscal policy in the coming year. Send us feedback and tips to ecodaily@bloomberg.net or get in touch on X via @economics. And if you aren't yet signed up to receive this newsletter, you can do so here. Days before a new president promising tax cuts was about to take office, the chair of the Federal Reserve warned in a Senate hearing about stimulatory fiscal policy stoking inflation and keeping interest rates high. That was January 1981. Paul Volcker told lawmakers that budget policy already tended to "strongly aggravate interest rate pressures" against a backdrop of high inflation, according to a New York Times account, at the time. And he emphasized that fiscal policy "is the most important" instrument besides monetary policy in stemming the surge in prices. Months later, before President Ronald Reagan's first tax-cut package, Volcker insisted that tax reductions should fit into a program of further spending cuts.  Former Fed Chair Paul Volcker Photographer: Pete Marovich Fast forward to today, and former President Donald Trump is pledging a fresh round of tax cuts if elected again in November. His likely opponent, Vice President Kamala Harris, has backed an expansion in social programs in the past. It's possible for economists to speculate that either one could adopt a fiscal stance that proves inflationary. Which could prove awkward for the Fed, just as it gets going on easing monetary policy. After their two-day meeting ends Wednesday, the widespread expectation is for Chair Jerome Powell and his colleagues to signal they're ready to move in September. Would or should Powell and others at the Fed call out fiscal proposals? It's unlikely, at least for now. But as the Fed embarks on a fresh review of its overall policy framework — due to start later this year — that could be one question to address. Looking back to 2021, many economists agree the Biden administration's $1.9 trillion aid package helped to stoke demand at a time when supply was constrained, contributing in some measure to the subsequent surge in cost of living. Regardless, Powell has acknowledged that the Fed in hindsight ought to have tightened policy sooner than it did. Based on that experience, "the Fed may become much more vocal in warning of a policy rate response" the next time that it looks like inflation will pick up steam, Steve Englander at Standard Chartered wrote in a recent note. The upcoming review will offer officials the chance to reflect on incorporating the fiscal outlook just as the next administration's initiatives begin to take shape. - Bank of Japan Governor Kazuo Ueda will be under intense scrutiny Wednesday when he announces rates and unveils his plans for QT.
- Bank of England asset sales are set to become a bigger headache for the UK Treasury.
- Ethiopia clinched $3.4 billion in IMF funds over four years, while Egypt unlocked $820 million in support from the Washington-based lender.
- South Korea's economy hasn't deleveraged enough, a central bank official said, warning that the failure to do so could limit future growth.
- Morgan Stanley's chief US economist Ellen Zentner moves to a new global role.
- Political turmoil in Venezuela is threatening to extend the nation's economic isolation and derail any moves toward restructuring its debt.
There is a lot of debate over whether high US rates have a cooling or stimulating effect on the economy. From your perspective, did high borrowing costs in the US help you get richer or hurt your finances? Share your views in a quick, anonymous in our survey. While a raft of economists have all cited immigration as a major plus for the US economy in terms of expanding the supply of labor and helping to keep down wage pressures, one of the less-considered angles is the impact on state and local authorities' budgets. With federal aid limited, municipal and state officials have had to foot the bill for shelter and other migrant-related costs. Barclays strategists including Mikhal Foux cautioned in a note last week that the surge in immigration "might cause a substantial and prolonged budget drag for local credits, particularly sanctuary cities" that have offered a harbor for undocumented people. "We project Chicago, Seattle, Boston, and New York to be the most cost burdened cities," the team wrote. Cities will need to make tradeoffs, "by reducing their budget from other areas, increase their revenue (via higher fees and taxes), dip into their reserve funds or increase borrowing," they said. | 
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