Bank of America (BofA) has drawn parallels between the current fiscal and monetary policies and those during the Reaganomics era, suggesting potential outcomes of high yields and a robust dollar, in an analysis published on Thursday. The bank highlighted factors such as the pandemic stimulus and the Federal Reserve’s hawkish stance, which are comparable to the 1980s’ loose fiscal policy and tightened monetary policy.
Long-term yields may stabilize above recent levels or rise due to a reversal in globalization trends, BofA predicted. This comes as the has seen a 2.2% increase since the beginning of the year, bolstered by strong foreign inflows into US bond and equity markets. This reinforces the notion of US exceptionalism, a concept that emphasizes the unique character of the United States as a uniquely free nation based on democratic ideals and personal liberty.
In scenarios without a soft landing or in case of a recession with persistent inflation, BofA expects both high yields and a strong dollar. However, concerns about US debt sustainability could potentially weaken the dollar despite higher yields.
On the other hand, a soft landing or a recession in a deflationary environment could lower both yields and the dollar. The bank’s analysis suggests that these outcomes are contingent on various economic factors and policy decisions, reflecting the complex interplay between fiscal policy, monetary policy, and market dynamics.
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