📍The US fiscal policy has shaped the US economy in 2026: Will there be no recession?

🔸Inflation is not low enough for the Fed to release the brakes as strongly as in 2020. Goldman Sachs believes the US economy will perform well in the first half of 2026 thanks to accommodative financial conditions (from the Fed) + government pumping money through the budget.
-> The cost is a baseline deficit. The US Congressional Budget Office projects FY2026 deficit ~ $1.7T (~5.5% of GDP). More importantly, public debt: the US has paid ~$970B in 2025; in 2026, interest costs ~3.2% of GDP (have surpassed the 1991 historical peak).

🔸The economy is unlikely to fall into deep recession like previous cycles because the Fed has been "ready" to pump money at any time once the balance sheet has been reduced to the target:
- With a deficit of ~5.5% of GDP, government spending will serve as a buffer if the private sector slows down -> a major recession is unlikely.
- In reality, the borrowing cycle continues: Treasury plans to borrow net $578B Q1/2026, after $569B Q4/2025; previously in Q3/2025, borrowing $1.058T.

🔸However, with a low ceiling, the economy will find it difficult to break out strongly even if the Fed pumps money:
- Fiscal policy maintains a pace for short-term growth but has an upper limit. The downside of US government spending to finance deficits is that long-term yields must be high.
- Meanwhile, debt held by the public ~95% of GDP (Q2/2025); rising interest payments -> push consequences further away rather than eliminate them.

🔸The paradox of the FCI (Financial Conditions Index):
- 2022–2023, the Fed tightened;
- 2024–2026, the FCI has eased thanks to fiscal expectations + risk returning to (supportive financial conditions).
-> Easing financial conditions only help prevent the economy from falling into a crisis spiral, not boost explosive growth.

🔸Accumulated consequences:
- Long-term yields are under pressure to rise to absorb the $500–600B/quarter borrowing schedule and a deficit of ~5–6% of GDP.
- The DXY continues to weaken in cycles as "US exceptionalism" cools down.
- Confidence in the US government is increasingly eroding as just the annual interest on government debt already amounts to $970B. Whether at some point the US will "burst" its debt is a difficult question to answer.

-> 2026 marks the era of growth by deficit (growth through deficit) paying the price with high yields, weak currency, and eroded policy space.