The Biden administration reportedly spent months preparing for an inflation spike that hasn’t come yet – and it’s still worried

President Joe Biden and Janet Yellen White House.JPG
President Joe Biden meets with Treasury Secretary Janet Yellen in the Oval Office at the White House in Washington, U.S., January 29, 2021.

  • White House and Treasury officials spent months testing inflation scenarios, the NYT reports.
  • No scenario showed inflation rising so quickly that the Fed would lose control of price growth.
  • The findings open the door for Biden to spend trillions more on infrastructure and social care.
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The Biden administration spent much of its first days in office testing how further stimulus might drive inflation higher. No modeled scenario saw price growth surge out of control, The New York Times reported on Wednesday.

Still, the report said repeatedly that White House and Treasury officials are “worried” about the issue.

The inflation debate has loomed large over the White House since before President Joe Biden was even inaugurated. The president unveiled a $1.9 trillion relief proposal in January, pitching the plan as an additional boost for the US economic recovery. Largely Democrat-affiliated economists have fiercely debated the inflation risks of such large deficit-financed spending, led by former Obama- and Clinton-administration official Larry Summers.

Democrats largely backed the measure, saying the risks of retracting government support were greater than the risks of spending too much. But Republicans – and even some moderate Democrats – balked at the hefty price tag and cited fears that another set of stimulus checks could spark a dangerous surge in inflation.

“This is the least responsible fiscal macroeconomic policy we’ve had for the last 40 years,” Summers said in a March interview with Bloomberg TV, adding the measures are a product of “intransigence” among Democrats and “irresponsible behavior” among Republicans.

Democrats went ahead without any Republican votes, passing the bill via reconciliation, and Biden signed it into law on March 11. Still, the stimulus push wasn’t without some trepidation. A handful of officials in the Treasury Department spent several months modeling how Americans would deploy new fiscal support, and whether any outcome could lead to stifling inflation, according to The Times. Treasury Secretary and former Federal Reserve Chair Janet Yellen even helped create the models.

Their observations were encouraging and lend new support to Biden’s latest spending proposal. The team tested a range of potentialities for how quickly Americans would spend stimulus, where they would deploy cash, and how the labor market’s recovery would affect inflation. Yet no outcome saw inflation charge out of the Fed’s control and risk a new recession, the Times reported.

The findings have been hinted at in statements from the White House and the Treasury in recent weeks. Long-term scarring in the labor market poses a greater risk than inflation, Yellen told ABC’s “This Week” in March. Economic reopening is expected to drive a jump in prices, but the effects will likely be temporary and fail to drive sustained inflation, she added.

The administration’s Council of Economic Advisors mirrored Yellen in a Monday blog post. A temporary rise in inflation is consistent with trends seen after other major events like wars or past labor-market rebounds, economists Ernie Tedeschi and Jared Bernstein said. The White House will continue to monitor consumer prices, but it expects inflation to fade as actual price growth “runs more in line with longer-run expectations,” they added.

Fed Chair Jerome Powell has repeatedly backed up such an outlook. The central bank chief said last month that the Fed will “be patient” in monitoring inflation and eventually lifting interest rates. The most likely scenario during the recovery is that prices move higher but fail to stay elevated as the country enters a new sense of normalcy, Powell said in early March.

Although the Fed operates independently from the executive branch and doesn’t play a role in fiscal spending, officials testing inflation scenarios told the Times that the Biden administration trusts the Fed to intervene and stave off price growth should it accelerate faster than expected.

The latest data signals the country is far from any sort of inflation scare. The Consumer Price Index – a popular gauge of overall inflation – rose 0.6% in March as stimulus, reopening, and vaccination fueled stronger economic activity. Economists expected a 0.5% gain.

Consumer prices rose 2.6% year-over-year, also exceeding estimates. The measure is skewed somewhat by year-ago data, since prices initially dropped when the pandemic first slammed the US economy. Those readings present a lower bar for year-over-year inflation. Though the data points to stronger inflation, price growth still has a ways to go before it trends at the Fed’s above-2% level and warrants serious concern.

That opening paves the way for additional spending. Biden unveiled a $2.3 trillion infrastructure proposal late last month that includes funds for nationwide broadband, improved roads and bridges, and affordable housing. The package is expected to be spent over eight years, compared to the weeks-long rollout seen with much of Biden’s stimulus plan. Such long-term deployment would present little inflationary risk, and Biden has portrayed the plan as an investment in American industry, jobs, and research as opposed to an emergency relief measure.

The March uptick in inflation, however, does signal that price growth is trending higher. Future CPI readings are set to be closely watched releases as the administration balances its spending goals with a red-hot economy. Economists and officials are anticipating stronger inflation. How price growth trends from there will determine whether the Biden administration was successful or created new risks.

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Inflation is coming back. Consumer prices climbed more than expected in March, data shows.

Walmart coronavirus shopping
Shoppers are seen wearing masks while shopping at a Walmart store, in North Brunswick, New Jersey, on July 20, 2020.

  • A popular gauge of US inflation rose faster than expected in March as the economy reopened.
  • Consumer prices rose 2.6% year-over-year, partially lifted by March 2020’s drop in price growth.
  • The Fed has signaled that reopening will drive a strong but transitory surge in inflation.
  • See more stories on Insider’s business page.

Prices of common consumer goods rose faster than expected last month as widespread reopening accelerated the economic recovery.

The Consumer Price Index, a popular measure of overall inflation, gained 0.6% from February to March, according to data published by the Bureau of Labor Statistics. Economists surveyed by Bloomberg had expected an increase of 0.5%. The reading follows a 0.4% gain in February. A 9.1% surge in gasoline prices drove the bulk of the uptick.

Core inflation – which excludes volatile energy and food prices – increased 0.3%. That also exceeded the median estimate of a 0.2% month-over-month jump.

Consumer prices jumped 2.6% year-over-year, marking the largest increase since the pandemic began. The reading also exceeded the economist forecast of a 2.5% climb. The measure is somewhat skewed, however, by data from March 2020, when prices declined when the pandemic first froze economic activity. That drop artificially lifts the year-over-year figure by giving the latest measure a lower bar to clear.

“We expect year-over-year inflation to remain steady as the upward pressure of a fast-reopening economy and fiscal stimulus is counteracted by somewhat tougher year-over-year comps,” David Kelly, chief global strategist at JPMorgan Asset Management, said.

Still, the increases suggest inflation will strengthen through the economic recovery, as expected. Price growth trended below the Federal Reserve’s 2% target for decades, signaling consistently weak demand. Now, with businesses reopening, consumers deploying stimulus-boosted savings, and hiring picking up, economists expect inflation to come in above 2% for some time.

The Fed anticipated such a bounce and has dampened concerns that inflation will run rampant. The central bank adjusted its inflation target in August to pursue above-2% inflation for a period of time to counter years of below-target price growth.

Fed Chair Jerome Powell has said that, while reopening will drive stronger inflation, the effect will likely be “transitory” and quickly fade as the economy enters a new normal.

“It is more likely that what happens in the next year or so is going to amount to prices moving up, but not staying up. And certainly not staying up to the point where they would move inflation expectations above 2%,” Powell said in early March, adding the central bank will “be patient” in waiting to pull back on its ultra-accommodative policy.

Americans, however, aren’t yet buying Powell’s message. The median expectation for one-year inflation rose to 3.2% last month, its highest point since 2014. The estimate for three-year inflation edged higher to 3.1% from 3%. Though the Fed hasn’t clarified how high it’s willing to let inflation run, 3% price growth would be the strongest since the early 1990s.

While it’s true that inflation expectations have steadily landed above actual inflation for decades, expectations alone can drive inflation higher. Businesses tend to lift prices and workers usually demand higher wages when the country expects stronger inflation over the next year.

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Americans unleashing pent-up savings could drive up inflation and rattle parts of the market, JPMorgan’s chief strategist says

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Americans have built up savings during COVID that could be unleashed.

US consumers unleashing their pent-up savings in a huge wave of spending could drive up inflation and rattle some parts of the stock market, JPMorgan Asset Management’s chief strategist for Europe has said.

Karen Ward said in an online presentation this week that JPMorgan estimates Americans have built up extra savings worth around 8% of US GDP during the COVID-19 pandemic, when their spending options have been limited.

Ward, a former top economic advisor to the UK’s finance ministry, said she thought most of this would be unleashed in a spending spree. When combined with Joe Biden’s $1.9 trillion stimulus bill – worth around 9% of GDP – that is likely to push inflation higher, she said.

“I’m not talking about runaway inflation of the 70s,” she said. “But I just think the risks in my view are more skewed towards inflation averaging 3% over the next 10 years, rather than inflation averaging 1% over the next 10 years.”

Core personal consumption expenditure inflation, the Federal Reserve’s preferred measure, stood at an annualized 1.5% in January.

Ward said that a rise in inflation was likely to generate volatility in parts of the stock market as investors reacted to the new situation. She added that confusion around the Fed’s new tolerance of higher inflation and employment would also create uncertainty.

Economists expect the US economy to boom in 2021, following the worst contraction since World War II in 2020. Yet they are divided on what this means for price levels, which is a key question for markets, given the importance of inflation to assets’ values and returns.

Whether or not inflation rises persistently “is the big question that nobody knows the answer to,” said Nasdaq chief economist Phil Mackintosh.

Rising growth and inflation expectations have already pushed bond yields sharply higher, with investors demanding a bigger return to account for price rises.

The move up in yields shook many investors in February and March. The tech stocks that did so well during the pandemic fell sharply, as bonds and stocks that are set to do better from strong growth and inflation started to look more attractive.

Ward said she thought bond yields would rise further as inflation picked up, and would probably generate further volatility in some parts of the market on the way.

The JPMorgan strategist said the Fed’s new mandate to tolerate higher inflation and employment may also cause problems.

“Not only do they want to reach full employment, but they also want inclusive employment. So what exactly does that mean?” she said. “I think that has the potential to generate us some volatility.”

Yet, she said the global stock market as a whole was unlikely to be majorly troubled because stronger growth should support companies’ earnings.

Many analysts believe inflation will remain low, however, that is partly because unemployment is set to remain higher than it was before the crisis in the medium term.

The Fed itself has signaled it does not think inflation will be damaging, with chair Jerome Powell reiterating that message on Thursday.

Jan Hatzius, Goldman Sachs’ chief economist, predicted in a note on Monday that US inflation would remain “well below the Fed’s 2% target, consistent with an economy that remains well below full employment.”

He added: “All this has increased our confidence that Fed officials will be able to stay the course in exiting only very gradually from their highly accommodative stance.”

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Biden breaks with Trump and says he’ll stick up for Federal Reserve’s independence

Trump Biden
  • Biden said he wanted to break with Trump in sticking up for the Federal Reserve’s independence.
  • “I want to be real clear that I’m not going to do the kinds of things that have been done in the last administration,” Biden said.
  • While he was in office, Trump pressured Fed Chair Powell against raising interest rates.
  • See more stories on Insider’s business page.

President Joe Biden said on Tuesday he would safeguard the independence of the Federal Reserve, breaking with his predecessor, Donald Trump, who often tried pressuring the central bank to lower the cost of borrowing.

“Starting off my presidency, I want to be real clear that I’m not going to do the kinds of things that have been done in the last administration – either talking to the attorney general about who he’s going to prosecute or not prosecute … or for the Fed, telling them what they should and shouldn’t do,” he said at a White House news conference.

“I think the Federal Reserve is an independent operation,” he said, adding he does speak with Treasury Secretary Janet Yellen. The Treasury did not immediately respond to a request for comment.

The remarks reflect another way that the president is distancing himself from his predecessor by preserving the Fed’s traditional independence from the White House. Trump heaped criticism onto Powell throughout his term, assailing him as “an enemy of the state” and a “terrible communicator” from his now-suspended Twitter account.

Trump furiously tried pressuring Powell from raising interest rates while the economy was in the middle of its longest expansion in history in the years leading up to the pandemic. At one point, he suggested Powell may be a “bigger enemy” of the US than China.

Powell played a critical role designing the Fed’s stimulus programs as vast swaths of the economy shut down last year. He also encouraged Congress to continue approving more federal aid for struggling individuals, small businesses, and state and local governments.

“Given the low level of interest rates, there’s no issue about the United States being able to service its debt at this time or in the foreseeable future,” he told NPR recently. Powell, a Trump nominee, has also downplayed the inflation risks stemming from the $1.9 trillion stimulus package.

Powell’s term as Fed chair expires in 2022, and Biden must decide whether to keep him onboard.

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Bill Gross is shorting US Treasurys and says inflation will be as high as 4% in coming months

FILE PHOTO: Billionaire investor Bill Gross listens during the Milken Institute Global Conference in Beverly Hills, California, U.S., May 3, 2017. REUTERS/Lucy Nicholson/File Photo

Billionaire “Bond King” Bill Gross told Bloomberg he is short US Treasurys and is expecting inflation to spike up in the US in the near future.

The PIMCO co-founder said in a Bloomberg TV interview he was short US Treasurys heading into the sell-off last week where the 10-year Treasury rose above 1.6% and prices fell. On Wednesday, the yield on the benchmark 10-year Treasury note hit 1.67%, a level not seen since mid-January 2020.

He’s still short Treasurys, and he also expects inflation to rise above the Fed’s target to 3-4% in the next few months as nearly $2 trillion in fiscal stimulation enters the market and household income goes “gangbusters.”

“There’s no reason to expect that inflation at least, not necessarily treasuries, but inflation at least will be screaming higher over the next several months and that’s what some investors are anticipating,” Gross said.

He added: “Inflation, you know, currently below 2% now is not going to be below 2% in the next few months. I see a 3% to 4% number ahead of us.”

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