The U.S. economy has demonstrated unexpected resilience in the post-pandemic period, surprising both Federal Reserve and private sector analysts. According to RBC Wealth Management, one key factor is the expanding federal budget deficit, which has driven demand and influenced household wages, corporate profits, and asset prices.
"The deficit...provided a fillip to the economy as it recovered," states RBC Wealth Management. However, concerns are rising about its magnitude. The current deficit stands at 6.5% of GDP—an unprecedented figure outside of a recession for the modern U.S. economy—which they describe as "a risky evolution of fiscal policy."
Despite not being worried about federal debt itself, RBC highlights two main concerns regarding the deficit: unsustainably fast growth potentially pressuring inflation and the significant amount of upcoming bond supply that could strain investor appetite.
In this context, longer-term interest rates are expected to remain elevated compared to previous low-rate environments due to rapid growth and large bond supplies requiring higher coupons for attraction. Yet high rates tend to self-correct through private sector adjustments or potential government interventions.
"To some extent...multiple corporate issuers pull billions in bond deals last month because rates were too high," indicating possible shifts in private sector activities offsetting government policies.
A third possibility involves government efforts towards a balanced budget led by Elon Musk's Department of Government Efficiency (DOGE), though political hurdles remain substantial.
RBC Wealth Management advises against investing paralysis amid economic uncertainty. They suggest that "fundamentally healthy adjustments" will occur naturally within the economy and highlight current yield levels offering cushioning against potential market shifts.
Holding diversified portfolios remains essential given global uncertainties such as COVID-19 impacts or financial crises. RBC concludes with a message urging caution without extending current growth expectations indefinitely: "Our message isn’t to be scared; it’s to not be euphoric."