A week ago, the news that the U.S. Senate approved the new fiscal stimulus round created euphoria in financial markets. More precisely, the stock market indices exploded higher, with the Dow Jones trading at a new all-time high literally every single day of the week.
The new round of stimulus is aimed at supporting the U.S. economy and the U.S. households directly. The $1.9 trillion dollars injected into the economy make up about 25% of the U.S. Gross Domestic Product (GDP), fueling fears of higher inflation in the years ahead. Indeed, inflation is trending higher on Google searches recently, as people are having a difficult time imagining low inflation under such circumstances.
Stronger Economic Growth Ahead
The U.S.’s response to the coronavirus health crisis surpassed all expectations. It dwarfs anything else seen in other parts of the world, and many fear that if anything should go wrong in the future, the global economy will be affected.
Truth be said, the announcement of the new fiscal package did not leave the world indifferent. Even central banks, as pointed by Christine Lagarde of the ECB last week, started to change their economic projections on the back of stronger growth in the United States. While no one argues about the initial impact (i.e., stronger economic growth), the risk is that by “doing too much,” the U.S. risks an inflationary spiral that will be costly to deal with in the future.
Biden’s fiscal package addresses various aspects of the economy. The financial media focuses on $1,400 stimulus checks to be sent to eligible Americans, but the package is more comprehensive. It also contains $300 a week jobless benefits, $14 billion for vaccine distribution, $25 billion for rental aid, or $350 billion in state/local aid.
In the meantime, the Fed remains calm. As inflation data last week pointed to no material increases, the Fed “gave the blessing” to the new round of stimulus. In fact, it explicitly asked for it, as it has often mentioned the need for more fiscal stimulus in previous conferences.
The Fed believes that higher inflation, should it come, will be cyclical and temporary and will represent only a bump in the road of disinflationary forces seen in the last years. So far, the markets are convinced, but one should not be surprised to see the Fed pressured by higher inflation in the months ahead.