Investors weren't relishing the idea of a government shutdown, but don't appear terribly excited with what they got in its place.
A budget that increases discretionary spending by nearly $300 billion in the coming years helped fuel worries that profligate federal spending would set of a chain reaction that triggers a recession, and ends the bull market in stocks.
But there's another side to all the free spending: The real possibility of an uptick in inflation — which this market currently fears more than anything. Already, the Treasury is forecasting nearly $1 trillion in borrowing needs this year, a sum that it projected to rise in subsequent years.
Combining the tax cuts and rise in discretionary spending likely will push the deficit, currently pegged at about 3.4 percent of GDP, to more than 5 percent by the end of 2018. That would put it at its highest-ever peacetime level outside of recessionary periods, according to Capital Economics.
"Fiscal policy could become a drag on the economy by 2020 if Congress failed to agree on a new deal to raise spending levels again, and the previous caps were re-imposed," economists Andrew Hunter and Michael Pearce at Capital economics wrote in a report for clients.
In the meantime, the economy is looking at fairly blue skies.
Goldman Sachs on Friday nudged its Q4 GDP forecast up to 2.6 percent, and the Atlanta Fed, though off its recent high of a 5.4 percent projection, still sees first-quarter growth coming in at 4 percent.
Longer-term, though, the picture gets less clear, and that's one of the things that has the market worried.
The Capital economists say they expect the Fed to hike rates four times this year — one more than central bank officials themselves have indicated. It's a scenario that appears increasingly possible considering the hawkish rhetoric lately and sprouting inflation signs.
Thai
Eng