As a senior portfolio manager, you are tasked with evaluating the potential impacts of recent changes in fiscal policy on your investment strategy. The government has announced a stimulus package aimed at increasing public infrastructure spending, alongside tax cuts for middle-income households. You are to analyze how these developments may influence economic growth, interest rates, and stock market performance in the short to medium term.
In your response, address the likely effects of the increased government spending on aggregate demand and how this could translate into changes in inflation expectations. Consider the relationship between the fiscal stimulus and interest rates, detailing the mechanisms by which fiscal policy can influence monetary policy decisions.
Finally, discuss the implications for equity investment, focusing on sectoral performance and potential risks associated with market reactions to ongoing fiscal measures.