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Will fiscal stimulus force the Fed to pump the brakes?

While the recently passed $1.9 trillion fiscal support package will undoubtedly help the US economy recover more rapidly from the COVID-19 pandemic than would otherwise have been the case, many fear that it will also result in a surge in inflation that complicates the Federal Reserve’s extremely accommodative monetary policy stance. These concerns are likely overdone.

While The Conference Board expects the new fiscal package to accelerate US real GDP growth to 5.5 percent year-on-year in 2021, other forecasters project the expansion could be as high as 6 to 7 percent. According to our analysis of these varying growth scenarios, it is unlikely that sustained inflation will rise to the rates needed to derail the Fed’s easy monetary policy guidance. At 5.5 percent GDP growth, the core PCE deflator—which the Federal Reserve uses to help guide US monetary policy—might be sustained at 2.2 percent year-on-year for several quarters before slowing, and at 7 percent GDP growth the core PCE deflator may peak at just 2.4 percent. These varying growth and inflation outcomes are unlikely to change Fed policy in a recovery environment; however, especially if unemployment rates have more room to fall, and the output gap—the difference between actual and potential GDP—remains wide for several years to come.

For a more detailed discussion of the US economic recovery and inflation outlook, please see our new report: StraightTalk® Are US Inflation Fears Justified? Yes and No.

 

 

 


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