The Federal Reserve building is pictured in Washington, DC, U.S., August 22, 2018. REUTERS/Chris Wattie
The Federal Reserve building is pictured in Washington, DC, U.S., August 22, 2018. REUTERS/Chris Wattie
PHOTO: Chris Wattie/Reuters
Now playing
01:47
Strategist: Not the best environment for rate cut
Now playing
01:35
Strategist: Congress will likely trim Biden's stimulus bill
roger mcnamee fb capitol markets now_00013227.png
roger mcnamee fb capitol markets now_00013227.png
Now playing
03:07
Early Facebook investor: Sandberg's denial of Facebook's role is 'laughable'
Democratic presidential candidate and former US Vice President Joe Biden speaks on the state of the US economy on September 4, 2020, in Wilmington, Delaware. (Photo by JIM WATSON / AFP) (Photo by JIM WATSON/AFP via Getty Images)
Democratic presidential candidate and former US Vice President Joe Biden speaks on the state of the US economy on September 4, 2020, in Wilmington, Delaware. (Photo by JIM WATSON / AFP) (Photo by JIM WATSON/AFP via Getty Images)
PHOTO: JIM WATSON/AFP/Getty Images
Now playing
02:02
Why Wall Street is hopeful about Biden despite economic challenges
PHOTO: Shutterstock
Now playing
02:54
Strategist on bitcoin: Pullback is very expected
Democratic candidates for Senate Jon Ossoff (L), Raphael Warnock (C) and US President-elect Joe Biden (R) bump elbows on stage during a rally outside Center Parc Stadium in Atlanta, Georgia, on January 4, 2021. - President Donald Trump, still seeking ways to reverse his election defeat, and President-elect Joe Biden converge on Georgia on Monday for dueling rallies on the eve of runoff votes that will decide control of the US Senate. Trump, a day after the release of a bombshell recording in which he pressures Georgia officials to overturn his November 3 election loss in the southern state, is to hold a rally in the northwest city of Dalton in support of Republican incumbent senators Kelly Loeffler and David Perdue. Biden, who takes over the White House on January 20, is to campaign in Atlanta, the Georgia capital, for the Democratic challengers, Raphael Warnock and Jon Ossoff. (Photo by JIM WATSON / AFP) (Photo by JIM WATSON/AFP via Getty Images)
Democratic candidates for Senate Jon Ossoff (L), Raphael Warnock (C) and US President-elect Joe Biden (R) bump elbows on stage during a rally outside Center Parc Stadium in Atlanta, Georgia, on January 4, 2021. - President Donald Trump, still seeking ways to reverse his election defeat, and President-elect Joe Biden converge on Georgia on Monday for dueling rallies on the eve of runoff votes that will decide control of the US Senate. Trump, a day after the release of a bombshell recording in which he pressures Georgia officials to overturn his November 3 election loss in the southern state, is to hold a rally in the northwest city of Dalton in support of Republican incumbent senators Kelly Loeffler and David Perdue. Biden, who takes over the White House on January 20, is to campaign in Atlanta, the Georgia capital, for the Democratic challengers, Raphael Warnock and Jon Ossoff. (Photo by JIM WATSON / AFP) (Photo by JIM WATSON/AFP via Getty Images)
PHOTO: JIM WATSON/AFP/Getty Images
Now playing
02:11
Economist: Even with a blue wave, Biden's tax ambitions could stall
FILE - The New York Stock Exchange is seen in New York, Monday, Nov. 23, 2020.   Stocks are ticking higher on Wall Street Wednesday, Dec. 23,  following a mixed set of reports on the economy.   (AP Photo/Seth Wenig)
FILE - The New York Stock Exchange is seen in New York, Monday, Nov. 23, 2020. Stocks are ticking higher on Wall Street Wednesday, Dec. 23, following a mixed set of reports on the economy. (AP Photo/Seth Wenig)
PHOTO: Seth Wenig/AP
Now playing
02:07
Dow falls on first trading day of the year
Now playing
01:02
Scaramucci: Bitcoin is due for a correction
Now playing
05:05
MoneyGram CEO: Our digital platforms are driving growth
PHOTO: CNN
Now playing
04:34
Airbnb CEO: People still yearn to travel
NEW YORK CITY- MAY 12: People walk through a shuttered business district in Brooklyn on May 12, 2020 in New York City. Across America, people are reeling from the loss of jobs and incomes as unemployment soars to historical levels following the COVID-19 outbreak. While some states are beginning to re-open slowly, many business are struggling to find a profit with the news restrictions and a population that is fearful of the contagious virus.  (Photo by Spencer Platt/Getty Images)
NEW YORK CITY- MAY 12: People walk through a shuttered business district in Brooklyn on May 12, 2020 in New York City. Across America, people are reeling from the loss of jobs and incomes as unemployment soars to historical levels following the COVID-19 outbreak. While some states are beginning to re-open slowly, many business are struggling to find a profit with the news restrictions and a population that is fearful of the contagious virus. (Photo by Spencer Platt/Getty Images)
PHOTO: Spencer Platt/Getty Images
Now playing
02:22
Economist: It's going to take years for jobs to recover
Now playing
01:29
Chewy's CEO expects growth to continue post pandemic
Now playing
02:04
These pot stocks are poised to win big under Biden
Specialist Patrick King works at the New York Stock Exchange on Monday, Nov. 23, 2020. Stocks rose in early trading Monday after investors received several pieces of encouraging news on COVID-19 vaccines and treatments, tempering concerns over rising virus cases and business restrictions.  (Nicole Pereira/New York Stock Exchange via AP)
Specialist Patrick King works at the New York Stock Exchange on Monday, Nov. 23, 2020. Stocks rose in early trading Monday after investors received several pieces of encouraging news on COVID-19 vaccines and treatments, tempering concerns over rising virus cases and business restrictions. (Nicole Pereira/New York Stock Exchange via AP)
PHOTO: Nicole Pereira/New York Stock Exchange/AP
Now playing
02:15
Dow crosses 30,000 mark for the first time ever
The Federal Reserve is seen in Washington, Monday, Nov. 16, 2020. President Donald Trump
The Federal Reserve is seen in Washington, Monday, Nov. 16, 2020. President Donald Trump's unorthodox choice for the Federal Reserve Board of Governors, Judy Shelton, could be approved by the Senate this week, according to Majority Leader Mitch McConnell's office. (AP Photo/J. Scott Applewhite)
PHOTO: J. Scott Applewhite/AP
Now playing
03:39
Alan Greenspan on the Fed's pandemic response
Now playing
02:54
GoodRx Co-CEO says Amazon Pharmacy isn't a competitor
(CNN Business) —  

America’s economy is in a period of historic prosperity, but you wouldn’t know it from Washington’s policymaking.

The federal government has a long track record of treating recessions by handing out a powerful dose of medicine to bring the economy back to life. Congress and the White House typically rush through massive tax cuts and government spending increases aimed at keeping the economy humming. The Federal Reserve slashes interest rates to encourage businesses and households to spend.

Washington is turning to this strategy again today — even though the economy does not appear to be seriously ill.

The $1.37 trillion bipartisan budget agreement reached on Monday would raise government spending by $321 billion over the next two years. The deal is designed to avert a debt ceiling crisis. And investors believe it’s a slam dunk that the Fed will cut interest rates next week for the first time in nearly 11 years in an effort to bolster inflation and offset trade uncertainty.

Although the economic outlook has darkened — in large part because of the US-China trade war — few economists expect an imminent recession.

The unemployment rate is near 49-year lows, the stock market has never been higher and consumers are spending. That’s not exactly the backdrop that would normally require the Federal Reserve and Congress to come to the rescue.

“Washington is giving antibiotics to a healthy child. That’s just bad medicine,” said David Kelly, chief global strategist at JPMorgan Funds, in an interview with CNN Business. “We will look back and think about how irresponsible and adolescent we were to use every piece of monetary and fiscal ammunition to boost an economy that was doing just fine.”

No rainy day fund

Normally, the Fed and Congress would have used these good economic times to build up ammo to fight the next recession. That means cutting the budget deficit and raising interest rates.

“This is a time when you should be preparing yourself for a rainy day,” Kelly said. “But we’re not doing that, so we will be poorer in the long run because of it.”

Kristina Hooper, chief global market strategist at Invesco, called Washington’s dual-pronged response to economic prosperity “bizarre.”

“It’s almost Twilight-Zone economics. It doesn’t fit with where we are in the economic cycle,” Hooper said.

To be sure, it’s a short-term positive for the economy and markets that Trump and Congressional leaders appear to have averted a budget crisis. The budget agreement, which still needs to be passed by Congress and signed into law by Trump, calls for suspending the debt limit until July 31, 2021.

However, the overall trajectory of the budget remains in alarming shape.

$1 trillion deficits on the horizon

The Congressional Budget Office has projected the federal deficit will hit $895 billion in 2019 and climb above $1 trillion by 2022.

Many economists have applauded President Donald Trump’s desire to make Corporate America more competitive by lowering corporate taxes. However, the 2017 tax overhaul added to the federal deficit, sapping the government of revenues during a strong economy.

Relative to the size of the economy, the CBO projects the deficit would average 4.3% of GDP between 2020 and 2029. The CBO said that besides just after World War II, the only other time the average deficit was so large over so many years was after the Great Recession.

In times of economic prosperity, the US government moves toward a balanced budget.

“It’s a bipartisan debt binge,” said Danielle DiMartino Booth, CEO and chief strategist for Quill Intelligence. “It’s sad that we’re running up a trillion dollars of debt every year and have so little to show for it.”

JPMorgan’s Kelly said that there have only been two years in the past 71 when the budget deficit as a share of GDP has been above the unemployment rate: 2009 and this year.

The nonpartisan Committee for a Responsible Federal Budget estimates that the agreement will add about $1.7 trillion to the federal debt over the next decade. If the deal passes, CRFB said that discretionary spending will have climbed by as much as 22% over Trump’s first term.

“It may end up being the worst budget agreement in our nation’s history, proposed at a time when our fiscal conditions are already precarious,” Maya MacGuineas, the group’s president, wrote in a statement.

Here comes the Fed

Meanwhile, the Fed is preparing to lower interest rates — a strategy that officials have likened to taking out “insurance” on the economy.

In recent public appearances, Fed chief Jerome Powell has downplayed positive developments and emphasized soft inflation, trade tensions and turbulence in foreign economies.

Some believe that looming rate cuts — investors are pricing in at least three rate cuts by the end of the year — are justified by these concerns as well as red flags in the bond market.

The yield curve has inverted, meaning short-term rates are below long-term rates. That has been a reliable recession indicator in the past and a signal that the Fed has raised rates too aggressively.

“The longer this inversion persists, the more damage is done to the economy,” said DiMartino Booth, a vocal critic of the Fed who previously worked at the Federal Reserve Bank of Dallas.

The economic data has been mixed. While the unemployment rate is low and retail sales are strong, manufacturing activity has stalled under the crushing weight of tariffs. Some regional manufacturing surveys have recently rebounded, although the Richmond Fed’s manufacturing index released on Tuesday tumbled to a six-year low.

“Economic conditions aren’t spectacular, but they aren’t bad either,” said Guy LeBas, chief fixed income strategist at Janney Capital Markets.

LeBas said he doesn’t believe the latest economic metrics, financial market action nor inflation rate justify a rate cut.

“I think John Maynard Keynes would roll over in his grave, get up and smack Jay Powell in the face,” LeBas said, referring to the famed economist who advocated for government intervention to halt recessions.

Jan Hatzius, chief economist at Goldman Sachs, wrote in a report on Monday that the “justification for rate cuts at the current juncture is tenuous.”

Insurance isn’t free

Still, the Fed has little choice but to lower rates, because it has allowed markets to price it in already. Failing to act could create market mayhem that spills over into the real economy.

However, there are risks involved with prematurely lowering rates. Hatzius warned that with financial conditions “already very easy” further rate cuts “could raise financial stability concerns down the road.”

In other words, the Fed could inflate an asset bubble by forcing investors to take risks to generate returns.

“It’s not costless to take out insurance,” Boston Fed President Eric Rosengren, a voting member of the central bank, told CNBC last week. “You pay a premium for the insurance. And one of the ways that you think about that cost is what you’re doing to financial stability.”