{"id":27367,"date":"2026-01-01T19:23:12","date_gmt":"2026-01-01T17:23:12","guid":{"rendered":"https:\/\/www.liberalglobe.com\/?p=27367"},"modified":"2026-01-01T19:23:12","modified_gmt":"2026-01-01T17:23:12","slug":"the-dangers-of-the-huge-stimulus-packages-coming-to-the-us-and-eurozone","status":"publish","type":"post","link":"https:\/\/www.liberalglobe.com\/?p=27367","title":{"rendered":"The Dangers of the Huge Stimulus Packages Coming to the US and Eurozone"},"content":{"rendered":"\n<p>Both the US and European economies are preparing to receive strong fiscal and monetary stimulus packages, without even being in recession, as is traditionally the case when such stimulus packages are implemented in the economy.<\/p>\n\n\n\n<p>Trust Economics specifically refers to the following stimulus packages:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>US \u2013 Fiscal:<\/strong> In the first quarter of 2026, the largest impact from the \u201cBig Beautiful Bill\u201d passed in July is expected. Some of the fiscal stimulus is due to a technical \u201crebound\u201d from the government shutdown at the beginning of the fourth quarter, but even with this data, the net effect remains positive. If one excludes the extraordinary measures due to the pandemic, this is the strongest fiscal stimulus in a single quarter since the Global Financial Crisis.<\/li>\n\n\n\n<li><strong>US \u2013 Monetary:<\/strong> The Fed cut interest rates by 75 basis points between September and December 2025, following 100 basis points of cuts in late 2024. That\u2019s a total of 175 basis points in 15 months, the fastest pace of cuts outside of a recession since the 1980s.<\/li>\n\n\n\n<li><strong>Eurozone \u2013 Fiscal:<\/strong> The impact of the German fiscal stimulus is expected in 2026, which is estimated to outweigh the overall fiscal tightening in France and Italy.<\/li>\n\n\n\n<li><strong>Eurozone \u2013 Monetary:<\/strong> The ECB cut interest rates by 200 basis points from mid-2024 to mid-2025, and policy transmission lags mean the impact will continue to be felt in the economy in 2026. Since its creation, the ECB has not implemented such rapid rate easing except during the Global Financial Crisis. This time, however, the economy has grown in every quarter.<\/li>\n<\/ul>\n\n\n\n<p><strong>Markets are already reacting\u2026<\/strong><\/p>\n\n\n\n<p>In the past two weeks, markets have started to price in interest rate hikes in several economies. The global economy has proven more resilient than expected to recent shocks, such as tariffs and interest rate hikes in 2022-2023. This resilience, combined with the new fiscal stimulus, creates a strong foundation for 2026, Trust Economics estimates.<\/p>\n\n\n\n<p>In the Eurozone, the probability of an ECB rate hike is increasing. Until recently, the market was pricing in a 40% chance of a hike in 2026, with two-year German, French and Italian bonds reaching their highest levels since March, on the back of fiscal announcements in Germany.<\/p>\n\n\n\n<p>Similar moves were seen in Canada and Australia, where markets are fully pricing in rate hikes in 2026.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"381\" src=\"https:\/\/www.liberalglobe.com\/wp-content\/uploads\/2025\/12\/image-136.png\" alt=\"\" class=\"wp-image-27368\" srcset=\"https:\/\/www.liberalglobe.com\/wp-content\/uploads\/2025\/12\/image-136.png 1024w, https:\/\/www.liberalglobe.com\/wp-content\/uploads\/2025\/12\/image-136-300x112.png 300w, https:\/\/www.liberalglobe.com\/wp-content\/uploads\/2025\/12\/image-136-768x286.png 768w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p><\/p>\n\n\n\n<p>Trust Economics points to two key risks, however, from large stimulus packages:<\/p>\n\n\n\n<p><strong>1.<\/strong> <strong>Underestimated inflation risk: <\/strong>Investors appear to be anticipating a smooth deflationary path, despite unusually high fiscal and monetary measures outside of a recession. Historically, such a combination of measures has tended to increase inflation, as in the US in the 1960s and Japan in the 1980s.<\/p>\n\n\n\n<p><strong>2. Underestimated central bank hawkishness:<\/strong> If inflation rises more than expected, banks will be forced to tighten. The Fed and ECB could surprise markets by keeping or raising interest rates, as yield curves already react differently in the US and the eurozone.<br>In the US, 57 basis points of further cuts are priced in for 2026, partly due to the Fed chief\u2019s expected more dovish stance and the Fed\u2019s dual mandate that takes employment into account. The 2\/10-year curve is now the steepest since early 2022.<\/p>\n\n\n\n<p>In Europe, the curve is not as steep as markets are starting to price in rate hikes, mainly affecting the short-term part of it.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"798\" height=\"438\" src=\"https:\/\/www.liberalglobe.com\/wp-content\/uploads\/2025\/12\/image-137.png\" alt=\"\" class=\"wp-image-27369\" srcset=\"https:\/\/www.liberalglobe.com\/wp-content\/uploads\/2025\/12\/image-137.png 798w, https:\/\/www.liberalglobe.com\/wp-content\/uploads\/2025\/12\/image-137-300x165.png 300w, https:\/\/www.liberalglobe.com\/wp-content\/uploads\/2025\/12\/image-137-768x422.png 768w\" sizes=\"auto, (max-width: 798px) 100vw, 798px\" \/><\/figure>\n<\/div>\n\n\n<p><\/p>\n\n\n\n<p>The current stimulus creates opportunities for investment in high-risk assets, but the situation could change abruptly once central banks decide to \u201cremove stimulus,\u201d warns Trust Economics. As happened in 2020-2022 with the pandemic, the initial bull market could quickly turn into a bear market if inflation returns and interest rates rise aggressively.<\/p>\n\n\n\n<p>Trust Economics emphasizes that this time the risk of overheating is particularly high because the stimulus comes while the economy is already growing, not in recession, a key difference that many ignore.<\/p>\n\n\n\n<p>Fortunately, the economy has shown remarkable resilience in recent years, although markets are still at risk of being surprised, as happened between 2021-2022, when a bullish stimulus environment suddenly turned into an inflationary shock, resulting in a significant market decline as central banks aggressively raised interest rates.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Both the US and European economies are preparing to receive strong fiscal and monetary stimulus packages, without even being in recession, as is traditionally&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[859,5,860],"tags":[1983,25,1590,897,7689,46,2191,215,70],"class_list":["post-27367","post","type-post","status-publish","format-standard","hentry","category-economics","category-economic","category-fiscal-economics","tag-economy","tag-eu","tag-fiscal-liquidity-packages","tag-monetary-policy","tag-stimulus-packages","tag-tariffs","tag-trust-economics","tag-us","tag-usa"],"_links":{"self":[{"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/posts\/27367","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=27367"}],"version-history":[{"count":1,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/posts\/27367\/revisions"}],"predecessor-version":[{"id":27371,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/posts\/27367\/revisions\/27371"}],"wp:attachment":[{"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=27367"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=27367"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=27367"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}