The Biden Administration is injecting a massive amount of money into the market ahead of the upcoming election. This fiscal spending, which began in earnest in May, is becoming a significant variable in the financial market. The funds deposited in the Treasury’s TGA account decreased from $930 billion at the end of April to $730 billion on May 22. This means that approximately $200 billion was released into the market within a month.
When this money is released into the market, liquidity increases, potentially boosting the stock market. The Treasury buybacks, which begin on May 29, are efforts to artificially lower long-term Treasury yields. The Treasury plans to issue short-term bonds, buy long-term Treasuries, and supply $15 billion to the market through this process.
While such fiscal spending can increase liquidity and support the stock market, there is also a risk of backlash. The Federal Reserve is also participating in this money distribution by reducing quantitative tightening (QT) and planning to release an additional $35 billion into the market each month. These actions can have a positive impact on the stock market. However, this unlimited money supply could have a negative long-term impact on the financial market. The money dispersal that began in May seems intended to raise stock prices before the election, creating a favorable environment for re-election. Yet, the increase in the issuance of short-term bonds could place a long-term burden on the U.S. economy.
European countries are purchasing U.S. Treasury bonds to stabilize U.S. interest rates. However, most of these countries have current account deficits, making continuous Treasury purchases difficult. Despite this, the scale of U.S. Treasury issuance continues to increase.
The lives of America’s middle and working classes are becoming increasingly difficult. Consumption is decreasing due to inflation, and credit card debt is on the rise. In this situation, there is a possibility that the Federal Reserve will not lower interest rates. Goldman Sachs is predicting a low possibility of the Fed lowering rates.
The Biden Administration’s large-scale fiscal spending may boost the stock market in the short term, but it could be a significant burden on the economy in the long term. The financial markets are closely monitoring how the policies of Treasury Secretary Janet Yellen and the Biden administration will unfold over the next five months.
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