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.
  • See more stories on Insider’s business page.

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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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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Economists are divided about how bad inflation is going to get. Here are the 14 loudest voices on both sides of the issue.

Larry Summers, former Treasury secretary
Former Treasury Secretary Larry Summers.

  • The debate over inflation is intensifying as Biden pushes to spend trillions on infrastructure.
  • It’s largely an intra-party spat as moderates say stimulus risks rampant inflation, while many Democrats favor big spending.
  • Here are the 14 biggest names arguing for and against spending plans and the path of inflation.
  • See more stories on Insider’s business page.

A new debate is emerging as the US economy nears reopening, and it’s not as cut and dried as the party-line stimulus arguments that preceded it.

In one corner, economists and politicians argue they have learned lessons from the slow growth that followed the Great Recession, and “going big” is better than “going small. They posit that years of below-target price growth show the economy can run hotter than previously thought and fears of runaway inflation are overblown.

The other side fears that inflation overshoots can quickly morph into rampant price growth and that the Federal Reserve might lose its grip on inflation, plunging the country into a 1970s-like downturn. The lessons of the Great Recession are not as relevant as the lessons of the Great Inflation, they claim.

The argument was mostly partisan – with one significant exception – while Democrats were pushing to pass President Joe Biden’s $1.9 trillion stimulus plan. Yet with that measure now law and Biden now aiming to spend another $4 trillion, more and more moderates are raising concerns.

Here are the 14 loudest voices on both sides of the issue, from dueling central bank chiefs to renowned economists.

Against: Larry Summers

Larry Summers
Former US Treasury secretary Larry Summers.

Long a leading voice of the Democratic economic establishment, Larry Summers led early, vocal opposition to Biden’s $1.9 trillion stimulus. 

Representing a small-but-influential side of the party that opposes additional spending, the former Treasury Secretary (under President Bill Clinton) and director of the National Economic Council (under President Barack Obama), Summers repeatedly railed against the party’s stimulus strategy, suggesting in a Washington Post column that the latest package could spark “inflationary pressures of a kind we have not seen in a generation.”

More recently, Summers appeared on Bloomberg TV to accuse Congress of backing the “least responsible” macroeconomic policy of the past four decades. 

“What is kindling is now igniting. I’m much more worried that we’ll have either inflation or a pretty dramatic fiscal-monetary collision,” he said, adding that he sees only a one-third chance the Treasury and the Fed will see the combination of inflation and growth they’re hoping for.

For: Paul Krugman

paul krugman

Nobel laureate Paul Krugman has served as Summers’ foil in recent weeks, taking the side that Democrats’ massive spending is fitting for the scope of the pandemic’s fallout. Biden’s $1.9 trillion package is more “disaster relief” than stimulus, Krugman said in a New York Times column published last month.

“When Pearl Harbor gets attacked, you don’t say, ‘how big is the output gap?'” he added in a February debate with Summers hosted by Princeton University.

Inflation concerns are also likely overblown, according to the famed economist. Krugman posited that much of the $1,400 direct payments included in the latest aid package will be saved instead of spent. He said this is a positive outcome for inflation fears, as such a trend would fuel less inflation than if the entire payment was swiftly used to purchase goods and services.

Against: Olivier Blanchard

Olivier Blanchard
Olivier Jean Blanchard, French economist and professor who is a Senior Fellow at the Peterson Institute for International Economics attend during Festival dell’ Economia in Trento on May 30, 2019.

French economist Olivier Blanchard echoed Summers’ critiques in a series of February tweets, then in a longer article for the Petersen Institute. While “too much is better than too little” when it comes to relief spending, he wrote, Democrats’ plans are too large and risks overfilling the hole in the US economy.

“We should spend what we need to save people from poverty and fund the needed response to the pandemic. I think we do not need to spend $1.9 trillion for that, and we should have a smaller program,” he added.

The economist has modified his tone, however. In a later thread, Blanchard said part of the stimulus package should be contingent on how the virus develops.

If the pandemic worsens and Americans need more aid, they would receive full-sized checks. But if people need less support, Congress should only send out reduced checks, if they send any payments at all, he said in a February 27 tweet.

Somewhat lightheartedly, Blanchard also likened Biden’s plan to the old proverb of the elephant swallowed by a snake, accompanied by a cartoon, on Twitter.

“The snake was too ambitious. The elephant will pass, but maybe with some damage,” he said.

For: President Joe Biden

joe biden
President Joe Biden participates in a conference phone call with governors affected by a snowstorm in the Midwest and southwest Tuesday, Feb. 16, 2021, in the Oval Office of the White House.

The president is unsurprisingly one of the biggest supporters of the stimulus bill. Biden repeatedly emphasized the need to “go big” with a new package, and said he wouldn’t back down from some elements he campaigned on while running for president.

“This historic legislation is about rebuilding the backbone of this country, giving people in this nation — working people, middle-class folks, people who built the country — a fighting chance,” Biden said after signing the measure into law on March 11.

The president’s desire to pass the full $1.9 trillion bill marks a stark reversal from President Obama’s plan in similar circumstances. When pushing for more fiscal relief in the wake of the financial crisis, the Obama administration haggled with Republicans over the measure’s price tag and passed one less than half as large.

Biden instead used budget reconciliation to win passage in the Senate, forgoing Republican support entirely, and his advisors are now proposing a $3 trillion initiative to follow it, one that may also pass via reconciliation.

Against: Committee for a Responsible Federal Budget

US Treasury Building

The nonpartisan organization thought the American Rescue Plan was just too big, although it focused more on its colossal price tag than inflation fears.

Congress “shouldn’t shy away from borrowing what’s needed” to bridge the health crisis, but it also “can’t afford to ignore the long term,” the Committee for a Responsible Federal Budget said in a February press release.

“Ignoring this long-term debt picture will harm economic growth, hold down incomes, and make it even more difficult for us to tackle income inequality, support for families, and a backlog of necessary infrastructure improvements,” the CRFA added.

The nonprofit cited projections from the Congressional Budget Office as support for its argument. The office sees the federal debt pile reaching 102% of GDP by the end of the year and nearly doubling to 202% by 2051. Those figures didn’t account for the latest stimulus measure, either.

For: Jerome Powell

FILE PHOTO: Federal Reserve Board Chairman Jerome Powell presents the Monetary Policy Report to Senate Banking Committee during a hearing on The Semiannual Monetary Policy Report to the Congress on Capitol Hill in Washington, U.S., February 12, 2020. REUTERS/Yuri Gripas/File Photo
FILE PHOTO: Federal Reserve Chairman Jerome Powell testifies on Capitol Hill

Though the Fed chair has largely refrained from supporting or criticizing fiscal policy, his recent comments make clear he sees the inflationary risks associated with ARPA as of little consequence, at least for now.

Inflation is likely to move higher as stimulus boosts spending and the economy reopens, Powell said while testifying to the House Financial Services Committee on Tuesday. Still, the Fed’s “best view” is that such effects on inflation will be “neither particularly large nor persistent,” he added.

The central bank’s latest projections call for inflation to reach 2.4% by the end of the year before falling to 2% in 2022 and then trending slightly above the 2% target. That outlook matches the Fed’s updated framework that seeks inflation above 2% for a period of time before falling back to the desired threshold.

Powell’s remarks at last week’s policy meeting signal the inflation overshoot is expected and possibly necessary to bring about a full recovery. Seeking maximum employment is just as important to the Fed as controlling inflation, per the central bank’s dual mandate, and the tradeoff once thought to exist between the two might no longer be relevant.

“There was a time when there was a tight connection between unemployment and inflation. That time is long gone,” Powell said in a March 17 press conference. He implicitly acknowledged former President Donald Trump’s influence in dispelling a conception long held on the right: “We had low unemployment in 2018 and 2019 and the beginning of ’20 without having troubling inflation at all.”

Against: Haruhiko Kuroda

bank of japan haruhiko kuroda
Bank of Japan Governor Haruhiko Kuroda smiles as he leaves the International Conference on the Future of Asia in Tokyo May 24, 2013.

Not all central bank leaders are as unperturbed as Powell. Yields for government bonds have risen in recent weeks as investors brace for higher inflation. The trend signals people are forecasting strong economic recoveries, yet higher yields can also slow rebounds by prematurely lifting borrowing costs.

While Powell has shown little concern about the sell-off in Treasurys, Bank of Japan governor Haruhiko Kuroda recently fired back at rising yields on sovereign bonds. The central bank chief told parliament late last month that the Bank of Japan is ready to buy bonds in order to keep yields from rising too high.

“It’s important to keep the entire yield curve stably low as the economy suffers the damage from COVID-19,” he added.

Such policy, commonly known as yield curve control, can counter rising inflation expectations by keeping borrowing costs low. Fed policymakers have suggested they’re not yet considering such tools, but Kuroda’s comments signal other countries are willing to do more — and act now — to combat the effects of inflation.

For: Jason Furman

jason furman

Jason Furman, the former chair of President Obama’s Council of Economic Advisors, has taken a different path from his Harvard colleague Summers regarding the Biden administration’s efforts. The White House should err on the side of overfilling the hole in the economy and test the maximum growth estimates made by the CBO, he said.

“The idea you test potential by year after year throwing logs on the fire is incredibly compelling, but that’s not the same as spending over 10% of GDP in one year,” Furman told the Financial Times in February.

The benefits of the $1.9 trillion deal outweigh the risks “by a decent margin,” but spreading the relief out over a longer time horizon might dampen fears of a sudden inflationary surge, he added in a tweet.

Against: Ken Griffin

Ken Griffin

Citadel CEO and founder Ken Griffin entered the inflation debate on March 28 in an interview with the Financial Times, saying he expects the $1,400 payments included in Democrats’ stimulus plan to draw even more retail traders into the stock market.

He said he was concerned that a sudden surge in inflation could derail markets just as more everyday Americans are getting involved.

“Given the incredible amount of stimulus that has been unleashed, there is a possibility we see a real surge in inflation,” Griffin told the FT. “The question is whether it is transitory or becomes permanent and structural, and there is a much higher chance that it becomes entrenched than any other time over the past 12 years.”

Whether inflation rocks markets or not, retail traders are now a mainstay in the investing landscape, Citadel’s chief executive added.

For: Joseph Stiglitz

joseph stiglitz

The Nobel Prize-winning economist gave Axios his own take on Tuesday, saying he’s largely unafraid of inflation leaping out of the Fed’s control. While Summers’ concerns have basis in precedent, fearing inflation today is “totally unnecessary,” Stiglitz said.

“There’s an awful lot of scope to increase demand, both in terms of the American Reinvestment Act and the new infrastructure [plan] to bring us back into a more normal world where we don’t face that deficiency of aggregate demand,” he added.

Stiglitz also gave a more full-throated rebuttal to Summers’ thesis, noting Summers himself famously argued that secular stagnation — a period of low inflation and low growth — plagued the recovery from the financial crisis.

The observation is true, but the stagnation stems from a lack of spending, Stiglitz said.

“I think he didn’t really think through what he was saying because the irony was that we’ve been in a long period where we’ve been facing lack of aggregate demand at the national and global level,” he said.

Against: Greg Mankiw

Gregory Mankiw

While more hedged than most in the inflation debate, Greg Mankiw views Biden’s $1.9 trillion as possibly pushing growth “beyond the limit.” There’s still room for the government to lift demand and push the recovery forward, but overstimulating activity could stifle the expansion just as it picks up the pace, said the Harvard economics professor and former chairman of the Council of Economic Advisers under President George W. Bush.

“Fiscal policymakers may have already pushed on the accelerator hard enough to bring the economy close to its speed limit by year’s end, when widespread vaccination is likely to have released much of that pent-up demand,” Mankiw wrote in a New York Times column published in February.

Some elements of the bill, like spending on public health initiatives and aid for the hardest-hit Americans, are necessary, he added, but many receiving the direct payments aren’t in such dire need.

For: Claudia Sahm

Claudia Sahm

Strong inflation only becomes a major risk once it spirals out of control, Claudia Sahm, senior fellow at the Jain Family Institute and former Fed economist, told The New York Times in March.

Sahm has been outspoken in her support of the Fed’s positioning and previously criticized Summers for his opposition to new stimulus. 

“To me, overheating is inflation starts picking up, and it keeps going,” Sahm told the Times. “It could happen, but it would take a while and not only do we know how to disrupt a wage-price spiral — we know what it looks like.”

Sahm has also argued that Biden should continue to push for massive spending packages until it’s clear the economy has recovered, and then some. The $4 trillion infrastructure plan the president is slated to unveil on Wednesday “will not get us to the finish line” and instead can build momentum for more aid packages, the former Fed economist told Insider.

“We cannot afford to have another jobless recovery. That’s why we see both fiscal and monetary policymakers committed to getting people back to work safely as soon as possible,” she added.

Against: Niall Ferguson

Niall Ferguson
Niall Ferguson, Senior Fellow of Stanford University’s Hoover Institution, speaks during the Milken Institute’s 22nd annual Global Conference in Beverly Hills, California, U.S., May 1, 2019.

Famed economic historian and Hoover Institution fellow Niall Ferguson warned Powell in a March Bloomberg column that policymakers should keep the inflationary pressures of the 1960s and 1970s in mind when pursuing above-2% price growth.

Investors’ behavior in recent weeks suggests they “fear a repeat” of past decades’ hyperinflationary environments, Ferguson said. Powell has countered such concerns, but the breakeven inflation rate and steepening yield curve signal that inflation will still exceed the central bank’s expectations.

“The conclusion is not that inflation is inevitable. The conclusion is that the current path of policy is unsustainable,” Ferguson said.

A sudden rise in inflation expectations could lift rates and, in turn, damage highly levered companies and the government itself, he added.

For: Wall Street banks

NYSE Wall Street coronavirus

Economists at UBS, Goldman Sachs, and Morgan Stanley, among others, lifted their estimates for US economic growth in 2021 soon after the passage of the latest relief package. The firms now expect US GDP to reach pre-pandemic levels in the first half of 2021 and exceed those highs soon after.

Yet inflation isn’t concerning them much. Morgan Stanley sees price growth surging to 2.6% in April and May before dropping to 2.3% at the end of the year. Those levels are in accordance with the Fed’s guidance, economists led by Ellen Zentner said.

Economists at UBS were even more pointed. The roughly 10 million jobs still lost to the pandemic mean there’s room for a period of strong inflation, the team led by Seth Carpenter said.

“We see sustained growth, well in excess of the long-run sustainable pace, but we also see a substantial amount of labor market slack,” UBS added.

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Biden is splitting with Obama on the economy and the proof is in their stimulus plans

obama biden
Former President Barack Obama and Democratic presidential nominee Joe Biden greet each other with a socially distant “air” elbow bump at the end of a drive-in campaign rally at Northwestern High School on October 31, 2020 in Flint, Michigan

  • Biden’s first economic package was bold in its size, breadth, and lack of bipartisanship.
  • It’s a sharp contrast to the smaller package of the Obama era – and that era’s slower recovery.
  • It shows Biden doesn’t want to repeat that decade, and has an economic endgame in mind.
  • See more stories on Insider’s business page.

President Barack Obama and President Joe Biden faced similar circumstances in their first months in office. Both entered the White House in the midst of crippling economic downturns. Both immediately pursued emergency stimulus plans to put the country on track for a recovery. And both spent unprecedented amounts to do so.

But Biden is going bigger, and it could be a very big deal for the future of economic policy.

Biden came out swinging with his $1.9 trillion stimulus package, passed less than two months into his presidency. Beyond its size, scope, and speed, the plan signaled a major deviation from Obama-era logic on spending and working across party lines. The result was a wide-reaching package passed through reconciliation, one that picked up zero Republican votes in both the House and the Senate.

It showed that Biden doesn’t plan to govern like Obama, where the aim was as much bipartisanship as possible and a mindfulness of the size of the federal debt. Biden’s big spending has already evoked comparisons to FDR and LBJ – two presidents Axios reported Biden is very interested in these daysand he may just be getting started. The big question is what comes next.

“The recovery from the Great Recession was long and painful. It exacerbated inequality and other forms of economic scarring,” Claudia Sahm, a former economist at the Federal Reserve, told Insider. “Those experiences are fresh in the minds of policymakers and the public.”

Neither Obama’s office nor the White House responded to requests for comment.

Recover first, pay the bill later

Congress’ recession-recovery playbook has traditionally been fairly simple: offer support where needed, then pull back on aid and turn to austerity once the rebound is on track. Past downturns have seen calls for fiscal support quickly give way to deficit concerns among Republicans and Democrats.

But the record of recoveries from past downturns is informing Biden’s approach. The Federal Reserve’s decision to dampen inflation and start lifting interest rates in 2015 sparked years of weak growth and low inflation. Many economists have since looked back at the rate hikes and the Obama administration’s stimulus package as allowing for a plodding economic rebound.

Biden aims to avoid the same pitfalls. The president has repeatedly expressed his desire to “go big” with relief spending, and, judging by his $1.9 trillion stimulus plan’s popularity, Americans are on board. His strategy leans more on overfilling the hole in the economy than on prematurely closing the taps.

The very nature of the current slump changed the thinking around fiscal stimulus and paved the way for a new era of government support, said Jason Furman, professor of economics at Harvard University and chair of Obama’s Council of Economic Advisors.

“When there is a big disaster like Katrina or the Gulf oil spill or superstorm Sandy, we’ll spend $100 billion. This was like one of those disasters, but happening everywhere at the same time,” Furman said. “People don’t completely believe in fiscal stimulus. They do believe in disaster relief.”

Joe Biden Stimulus
President Joe Biden speaks before signing the American Rescue Plan Act.

Congressional Democrats and Federal Reserve officials have been lining up alongside Biden. The rush to austerity in 2009 was a “big mistake” that left the country in recession for five years, Senate Majority Leader Chuck Schumer said in a March interview on CNN.

More recently, Federal Reserve Chair Jerome Powell told NPR that the economic recovery still takes priority over the national debt. While the country’s spending path is currently unsustainable, low rates ensure it can pay off its debt until the economic activity fully rebounds.

The government will eventually have to put the federal debt on a sustainable path, “but that time is not now,” the Fed chair added.

The central bank is still projecting its first rate hike won’t arrive until after 2023, and officials have hinted they aren’t even considering pulling back on the Fed’s emergency asset purchases. Rising Treasury yields suggest investors have different expectations, but policymakers have so far been steadfast in their patience.

“If my 2010 self could see just how different we’re handling this recovery than we handled that one – when we were just pulling our hair out, because Congress was turning towards austerity when the unemployment rate was literally over 9% – it was just an outrageous approach to the recovery at that time,” Heidi Shierholz, director of policy at the left-leaning Economic Policy Institute and former chief economist to Obama’s secretary of Labor, told Insider. “And so this is just incredibly different.”

A lack of state and local spending hindered Obama’s recovery, but Biden is pouring in billions

Economists began to sound the alarm before the second stimulus, emphasizing the urgent need for state and local funding. As Insider’s Ben Winck and Joseph Zeballos-Roig reported at the time, the CARES Act’s $150 billion for local governments ran out on December 30 – and the lack of similar funds in the Great Recession likely slowed the subsequent recovery. That funding was also scrapped in former President Donald Trump’s second stimulus package; as CNN reported.

joe biden kamala harris oval office
President Joe Biden and Vice President Kamala Harris meet with Governors and Mayors in the Oval Office of the White House Friday, Feb. 12, 2021, to discuss the American Rescue Plan.

But Biden’s $350 billion in state and local aid will prove hugely consequential for cities like New York, which was uniquely pummeled by the pandemic. It was a measure supported and championed by every elected Democratic state treasurer.

It’s also the largest ever investment from the government in Native communities.

Biden’s next major package looks like it will be even bigger. Coming in two parts, the first focusing on physical infrastructure, like roads and bridges, and the second on human infrastructure, like education and childcare, it is expected to cost around $3 trillion.

Biden is embracing his new role as FDR-adjacent

When it comes to his legacy, Biden is reportedly excited about what’s forming. Axios reported that he recently met with presidential historians to discuss the size and speed of potentially huge changes, with comparisons abounding to Presidents Franklin Delano Roosevelt and Lyndon Baines Johnson, who both spearheaded huge expansions of the social safety net.

“The historians’ views were very much in sync with his own: It is time to go even bigger and faster than anyone expected. If that means chucking the filibuster and bipartisanship, so be it,” Axios’ Mike Allen and Jim VandeHei wrote. In fact, they report, Biden loves the narrative that he’s thinking bigger and bolder than Obama.

He’s even gotten praise from another longtime politician and Senate veteran: Progressive figurehead Bernie Sanders. In an interview with The New York Times’ Ezra Klein, Sanders praised Biden for moving past his more “moderate” past and “acting boldly” with the American Rescue Plan.

joe biden bernie sanders
Joe Biden greets Sen. Bernie Sanders before the Democratic presidential primary debate at Drake University on January 14, 2020 in Des Moines, Iowa.

Sanders expressed optimism to Klein, but noted many progressive initiatives remain unfulfilled, such as student debt forgiveness and an increase to the federal minimum wage.

Leonard Burman, the Paul Volcker Chair of Behavioral Economics at Syracuse University’s Maxwell School, told Insider that the Great Depression actually lasted as long as it did because Roosevelt and other leaders feared deficits too much.

FDR actually spent less than would have been “appropriate,” Burman said, and recovery really only came with the influx of spending that accompanied World War Two.

“People think of the New Deal as this really, really aggressive response to the Great Depression,” said Burman, who is also cofounder of the Urban Institute’s Tax Policy Center, and he said it limited pain by creating jobs for some people that needed them and providing other assistance, “but it was way too small. So we literally have now – as far as I know – we’ve never done this.”

“We have lots of experience with spending too little to try to get out of a recession. We don’t have any experience with spending too much,” Burman said. “So it’ll be interesting to see what happens.”

Rampant inflation is the new debt scare

Concerns around a surging government debt pile held back Obama’s stimulus in 2009. Today, the argument looming over Biden and his spending plans has to do with inflation. Specifically, whether all the money Biden is pushing into the economic recovery will fuel a big comeback or instead spark stifling hyperinflation.

The Fed is behind the push for stronger-than-usual price growth. The central bank updated its policy framework in August to target inflation that averages 2% over time, as opposed to the prior goal of simply pursuing 2% inflation.

Officials have since confirmed that, at least for a period after the pandemic, the Fed aims to let inflation trend above 2% to counter years of weak price growth, underscoring just how different the approach is this time around.

GettyImages 1229890667
Fed Chair Jerome Powell is due to speak on Thursday.

The Obama administration “had a hard time” getting some Democratic senators to lift the debt limit and spend roughly $831 billion on the American Recovery and Reinvestment Act, Furman told Insider.

The Biden administration, on the other hand, has had a far easier time uniting Democrats around trillions of dollars worth of relief spending.

“The inflation debate is largely taking place among economists. It’s not a concern that I’ve heard very much from members of Congress,” Furman said. “Biden benefits from people having much more tolerance for larger numbers than they used to.”

Biden and the Fed both want an equitable labor market

Going hand in hand with the Fed’s new inflation target is a goal to pursue “maximum” employment instead of its previous mandate of “full” employment. The updated strategy leans more on using a range of indicators to judge the labor market’s health than focusing on the headline unemployment rate.

Though the central bank acts independently of the White House, the new framework opens the door to economic policy that more aggressively targets a tighter and more equitable labor market.

“There was a time when there was a tight connection between unemployment and inflation. That time is long gone,” Fed Chair Powell said during a March 17 press conference. “We had low unemployment in 2018 and 2019 and the beginning of ’20 without having troubling inflation at all.”

Job gains seen at the end of the last economic expansion largely benefited racial minorities and lower-income Americans, two groups that underperformed the broader unemployment rate for years. Biden’s latest stimulus plan stands to lift demand and pull forward such gains. The millions of jobs still lost to the pandemic indicate there’s plenty of slack in the economy and, therefore, reason to supercharge growth with fiscal support, UBS economists said in a March 9 note.

That slack also supports calls for additional large-scale spending packages. The $3 trillion in new spending is still not enough to get the US economy to the finish line, Sahm told Insider.

“Both the 2001 and 2008 recession were jobless recoveries, in that GDP got back on track much sooner than employment,” she said. “A year into the pandemic, we are still missing 9.5 million jobs relative to pre-pandemic. We cannot afford to have another jobless recovery.”

It’s becoming clear just two months into his presidency that Biden has an endgame in sight: lots of government spending to create a more equitable economy.

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The US is recovering faster than expected but economic rebound is far from complete, Fed’s Powell says

Jerome Powell waits to testify before the Senate Banking, Housing and Urban Affairs Committee on his nomination to become chairman of the U.S. Federal Reserve in Washington, U.S., November 28, 2017.   REUTERS/Joshua Roberts
Federal Reserve Chair Jerome Powell.

  • The US economic recovery has progressed faster than expected, Fed Chair Jerome Powell said.
  • Still, a full recovery is far off and the Fed will keep support in place, he testified to Congress.
  • Today’s unemployment rate of 6.2% “underestimates the shortfall” in the labor market, Powell added.
  • See more stories on Insider’s business page.

Despite lower COVID-19 case counts, encouraging economic data, and an improved rate of vaccination, the US economy has plenty of work to do to fully recover, Federal Reserve Chair Jerome Powell said.

The US is nearing the end of the tunnel. Widespread vaccination suggests the country could have a grasp on the coronavirus’ spread by the summer – or sooner. Key indicators including nonfarm payrolls and manufacturing gauges also show sectors nearing or trending above their pre-pandemic levels. Democrats’ $1.9 trillion relief package stands to further accelerate growth coming out of lockdowns.

Still, government and Fed support are necessary to get the US back on track, Powell said.

“The recovery has progressed more quickly than generally expected and looks to be strengthening,” the central bank chief said in remarks prepared for testimony to the House Financial Services Committee on Tuesday. “But the recovery is far from complete, so, at the Fed, we will continue to provide the economy the support that it needs for as long as it takes.”

Powell reiterated that the path of the recovery hinges on the trajectory of the virus, a message uttered by Fed officials since the pandemic made landfall in the US last year. For now, that trajectory looks promising. The country reported 55,621 new cases on Monday, according to The New York Times, down 8% from two weeks ago. Hospitalizations are down 16% from two weeks ago.

The steady decline in cases has lifted household spending on goods, but the services industry is still mired in a downturn. Sectors hit hardest by the virus “remain weak,” and the current unemployment rate of 6.2% “underestimates the shortfall,” Powell said.

The central bank announced last week it would keep interest rates near zero and maintain its pace of asset purchases. It also published a new set of quarterly economic projections that reflected a considerably more optimistic outlook than the December set.

Fed policymakers now expect the unemployment rate to fall to 4.5% by the end of 2021 instead of the prior estimate of 5%, and see full-year economic growth of 6.5% this year, up from the previous forecast of a 4.2% expansion.

The new estimates reflect the strong economic gains made since December, but the Fed still has its eye on those left behind, Powell said.

“We welcome this progress, but will not lose sight of the millions of Americans who are still hurting, including lower-wage workers in the services sector, African Americans, Hispanics, and other minority groups that have been especially hard hit,” he added.

Powell is scheduled to testify alongside Treasury Secretary Janet Yellen at 12 p.m. ET on Tuesday. The two are then slated to appear before the Senate Banking Committee on Wednesday.

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Bitcoin won’t replace the dollar because it’s too volatile, Fed’s Powell says

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  • Cryptocurrencies like bitcoin are too volatile to replace the dollar, Fed Chair Jerome Powell said Monday.
  • Bitcoin has surged in price as companies including Tesla and Square invest in the token.
  • The Fed is still exploring use cases for a digital currency issued by the central bank, Powell said.
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Federal Reserve Chair Jerome Powell said Monday that, while the central bank is still exploring the potential for a central bank digital currency, cryptocurrencies like bitcoin can’t serve as an effective replacement to the US dollar.

Bitcoin has enjoyed new fame over the past year as large companies’ adoption of cryptocurrencies has sent prices surging. Companies including Tesla, MicroStrategy, and Square have all invested in the token. Meanwhile, players in the financial sector are warming to cryptocurrencies’ use as an alternative asset.

The positive developments helped bitcoin surge as high as $61,742 earlier this month as more investors looked to profit on the token’s growing popularity.

Powell has his doubts about cryptocurrencies and their supposed use cases. The tokens might be a substitute for gold, but their wild price swings make them unfit to replace the dollar, the central bank chief said during a teleconference hosted by the Bank of International Settlements.

“Crypto assets are highly volatile – see bitcoin – and therefore not really useful as a store of value,” Powell said, according to MarketWatch. “They’re not backed by anything. They’re more of an asset for speculation.”

Bitcoin fell slightly through the day following Powell’s remarks. The cryptocurrency traded just above $57,000 as of 2:30 p.m. ET, up roughly 98% year-to-date.

While cryptocurrencies aren’t likely to gain the Fed’s favor, the central bank has considered creating a digital currency of its own. The Fed partnered with MIT researchers in August to build and test a central bank digital currency. Officials sought to gain a better understanding of digital currencies and their potential implementation through the tests, Fed Governor Lael Brainard said at the time. Still, the token included in the study was merely “hypothetical,” she added.

Powell reiterated that, though the bank is still studying the potential for a digital dollar, serious vetting is necessary before such a currency is implemented.

“To move forward on this, we would need buy-in from Congress, from the administration, from broad elements of the public, and we haven’t really begun the job of that public engagement,” the Fed chair said. “Because we’re the world’s principal reserve currency, we don’t need to rush this project. We don’t [need] to be first to market.”

Somewhere between a central bank digital currency and cryptocurrencies exist stable coins. These tokens counter the volatility seen with cryptocurrencies by tying their value to more stable assets like government-issued currencies.

Stable coins are “an improvement” over cryptocurrencies and “may have a role to play” in digitizing the dollar, but they’re unlikely to form the foundation for a global payment system, Powell said. Any candidate for a global currency controlled by a private company deserves “the highest level of regulatory expectations,” he added.

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Fed Chair Jerome Powell says central bank-backed digital currencies must coexist alongside cash and other forms of money

jerome powell fed mask
Jerome Powell.

  • Fed Chairman Jerome Powell said potential central bank digital currencies must coexist with cash.
  • COVID-19 has brought forward the need to address the limitations of current payments, he said.
  • Achieving an improved payments system would require multiple stakeholders to collaborate, he said.
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Federal Reserve Chairman Jerome Powell said on Thursday prospective digital currencies issued by central banks must accompany cash and other types of money within a flexible payment system.

“A recent report from the Bank for International Settlements and a group of seven central banks, which includes the Fed, assessed the feasibility of central bank digital currencies (CBDCs) in helping central banks deliver their public policy objectives,” Powell said in prepared remarks at a payments conference hosted in Basel, Switzerland.

“One of the three key principles highlighted in the report is that a CBDC needs to coexist with cash and other types of money in a flexible and innovative payment system.”

The COVID-19 crisis has underscored the less systematic areas of the current payment system and sped up the need for digitalization, he said. The Federal Reserve Bank of Boston is said to be collaborating with MIT researchers to explore digital currencies in addition to experiments the Fed’s board of governors is conducting.

Powell was addressing attendees at a conference aimed at discussing improvements in cross-border payments hosted by the Committee on Payments and Market Infrastructures.

“By definition, cross-border payments involve multiple jurisdictions,” he said. “So it will only be through countries working together, via all of the international forums-the Group of Seven, the G-20, the CPMI, the FSB, and others-that solutions will be possible.”

He said that achieving an improved payments system would be made possible through the combined engagement of policymakers, private-sector participants, and academia.

Powell recently said that a potential digital dollar is a “high priority” project for the US, although that comes with notable technical and policy-related issues. As the issuer of the world’s reserve currency, the US doesn’t have to be the first to create one, but it does have to get it right, he said.

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Fed’s Powell says it’s not yet time to consider shrinking emergency asset purchases

jerome powell
Federal Reserve Chairman Jerome Powell.

  • It’s “not yet” time for the Fed to even consider pulling back its policy support, Chair Powell said.
  • Fed policymakers ruled to hold interest rates at historic lows and maintain its asset purchases.
  • The recovery is “highly uncertain” and the economy is far from hitting the Fed’s goals, Powell said.
  • See more stories on Insider’s business page.

The Federal Reserve expects a strong economic recovery through 2021, but it still aims to maintain ultra-easy financing conditions well into the future.

Members of the Federal Open Market Committee ruled on Wednesday to hold interest rates at historic lows following the conclusion of its two-day meeting. The central bank will also maintain its pace of purchasing at least $80 billion in Treasurys and $40 billion in mortgage-backed securities each month, according to a press release.

Buying such assets accommodates smooth market functioning and thereby supports “the flow of credit to households and businesses,” the Fed said in a statement.

Yet investors and economists alike have looked to Fed officials in recent weeks for any hints at when the central bank will taper its purchases. An unexpected withdrawal from the Fed could spark a sell-off in Treasurys, rapidly lift yields, and prematurely raise borrowing costs while the economy is still rebounding.

Policymakers’ newly improved projections for growth and employment place new pressure on the central bank to tighten monetary policy. Still, it’s “not yet” time to even consider tapering due to lasting risks to the economic outlook, Powell said during a press conference.

Concerns of a rate hike coming earlier than the Fed’s signaling also overlook the lasting risks to the US recovery, the central bank chief added.

“The state of the economy in two to three years is highly uncertain and I wouldn’t want to focus too much on the timing of potential rate increase that far into the future,” Powell said.

Staying on target for inflation and maximum employment

The statement underpins previous commentary from the Fed emphasizing it will patiently wait to reach its goals of above-2% inflation and maximum employment. Economic reopening and stimulus might drive a sudden rise in inflation, but the increase isn’t likely to be permanent, Powell said.

Inflation would then need to steadily trend above 2% before the Fed fully retracts its policy support, he added.

Reaching maximum employment is set to be a similarly lengthy process. While Fed officials now see the unemployment rate falling to 4.5% in 2021, the central bank is also tracking wage growth and labor force participation to determine the labor market’s health.

“No matter how well the economy performs, unemployment will take quite a time to go down and so will participation,” Powell said. “The faster the better. we’d love to see it come sooner rather than later.”

Maintaining loose monetary policy for such a long period marks a paradigm shift for the central bank. Decades-old tenets of economic theory held that unemployment could only drop so much before lifting inflation.

That dynamic is antiquated, at least according to the Fed chair. The previous expansion showed that, even with unemployment below 4% and inflation trending below 2%, hiring and wage growth could improve in historically underserved communities. Failing to give those groups a shot at a robust recovery would set the country back as it emerges from the pandemic, Powell said.

“There was a time when there was a tight connection between unemployment and inflation. That time is long gone,” he said. “We had low unemployment in 2018 and 2019 and the beginning of ’20 without having troubling inflation at all.”

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The Fed’s inflation expectations are ‘optimistic’ and inflation could hit 2.75% by year-end, former Fed special adviser Andrew Levin says

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Fed chair Jerome Powell.

  • Former Federal Reserve special adviser Andrew Levin says inflation could hit 2.75% by year-end.
  • The Dartmouth Economics Professor added that he believes the Fed’s inflation targets are “optimistic.”
  • Levin called the Fed’s Wednesday remarks “a little stale” and said six month annual core PCE inflation is already above 2%.
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The Federal Reserve’s inflation expectations are “optimistic” as inflation could hit 2.5% or even 2.75% by the end of 2021, according to Andrew Levin, a former Federal Reserve special adviser.

Levin sat down with Yahoo Finance on Wednesday after the Federal Reserve meeting to discuss recent announcements.

The Federal Reserve announced on Wednesday that it will maintain target interest rates at near-zero levels and reiterated its commitment to quantitative easing, as well as aggressive asset purchases.

It also revealed it believes the unemployment rate will fall to 4.5% by the end of this year with inflation reaching 2.2%. Just three months ago the Fed predicted an unemployment rate of 5.0% by the end of 2021 and inflation not touching 2% until 2023.

Former Federal Reserve special adviser and current Dartmouth economics professor Andrew Levin said that chairman Powell and the US central bank may be optimistic when it comes to their expectations for low inflation.

“The statement [the Federal Reserve] issued at two o’clock is a little stale. It says that inflation is still running below 2%. The truth is the six-month annual rate of core PCE inflation is already above 2%. So the 2.2% projection for the year as a whole is somewhat optimistic,” Levin said, referring to personal consumption expenditure, which is the broadest set of inflation data tracked by the Fed.

The former Federal Reserve special adviser added that if inflation continues to pick up steam “we could be looking at 2.5% or even 2.75% core inflation.”

Levin said the Fed needs to be clear in communicating how high inflation should be allowed to go if the economy continues to recover, and they should have “contingency plans” in case of a slow down.

Levin’s comments may cause additional anxiety among hedge fund managers, who now believe inflation is the top “tail risk” facing the stock market, according to a Bank of America fund manager survey.

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The 10-year Treasury yield has jumped to its highest in 14 months, cutting further into gains for growth stocks

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Federal Reserve Chairman Jerome Powell.

  • Borrowing costs are rising as implied by the benchmark 10-year Treasury yield, which hit its highest since January 2020.
  • Tech stocks fell as the yield pushed past 1.6%, drawing the Nasdaq Composite down 1% during Wednesday’s trading session.
  • The Fed would likely spring into action if the 10-year yield were to hit 2% by the end of March, says one analyst.
  • See more stories on Insider’s business page.

Borrowing costs as tracked by the 10-year Treasury note yield rose to their highest in 14 months on Wednesday, with investors pricing in expectations of hotter inflation while they cut down high-flying growth stocks.

The yield on the benchmark 10-year Treasury note hit 1.67%, a level not seen since mid-January 2020, before the COVID-19 outbreak was declared a pandemic and before it had accelerated in the US. Yields rise as bond prices drop.

The yield has quickly pushed higher since the start of 2021, from around 0.9%, bolstered by improvement in the world’s largest economy after it and other economies worldwide fell into recession last year.

“What the market is trying to price in is a much more optimistic Fed … that is likely to remain committed to providing more accommodation into this economic recovery,” Ed Moya, senior market analyst at Oanda, told Insider on Wednesday before the release of the Federal Reserve’s economic projections and monetary policy decision at 2 p.m. Eastern.

Along with growth, investors also expect inflation to increase and for the Fed to begin raising interest rates after they slashed them to near zero in March 2020 in response to the health crisis.

The step-up in the 10-year yield, which is tied to a range of lending programs including mortgages, has spurred a pullback in growth stocks, notably large-cap tech stocks, and a rotation into cyclical stocks set to benefit when an economy improves.

Those moves showed up Wednesday with the tech-concentrated Nasdaq Composite falling by 1.1% and the S&P 500‘s information technology sector losing 1.3%. Shares of Apple dropped by 2.2%, Google’s parent company Alphabet declined 1.7% and Microsoft gave up 0.8%.

“You’re probably going to see that the Fed is still going to be stubborn as far as when that first rate hike is going to happen, but the markets are just going to go ahead and price that in a lot sooner,” said Moya.

There are market expectations that the Fed will begin raising its fed funds target rate in 2023 from the current range of zero to 0.25%. Meanwhile, more fund managers now consider higher-than-expected inflation would be the biggest danger to the market, replacing COVID-19 as the main risk, according to a Bank of America survey for March.

The US economy is expected to recover further with the US government circulating COVID-19 vaccines from three companies — Pfizer and its partner BioNTech, Moderna, and Johnson & Johnson — and with about 111 million people already vaccinated.

“Also, it doesn’t hurt when you have almost $2 trillion in [fiscal] stimulus get done since your last policy meeting,” said Moya, adding that “the economy is likely to run hot for a little bit.”

A steady grind higher of the 10-year yield “is completely healthy,” said Moya.

“But if this pace continues [and] by the end of the month we’re above 2%, that is going to be somewhat disruptive to the economic recovery,” which would likely prompt the Fed to take action, he said. The Fed’s tools include buying more Treasury bonds, he added.

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