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

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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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US futures hover near record highs as investors nervously await key US inflation data

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Wall Street awaited US inflation data on Tuesday.

Futures contracts for the major US stock indices were mixed on Tuesday, hovering near record highs as investors awaited key inflation data from the world’s biggest economy.

S&P 500 futures were edged 0.05% higher after the index finished 0.02% lower on Monday, taking it narrowly below Friday’s all-time high. Dow Jones futures rose 0.1% and Nasdaq 100 futures were roughly flat.

Asian stocks moved broadly higher overnight after data showed Chinese imports and exports rebounded in March. Japan’s Nikkei 225 rose 0.72%, but China’s CSI 300 index slipped 0.16% as a spike in yields on the debt of a major asset manager unnerved investors.

In Europe, the continent-wide Stoxx 600 index rose 0.25%. The UK’s FTSE 100 slipped 0.04% despite data showing the country’s GDP rose 0.4% in February.

Meanwhile, bitcoin soared to an all time high of above $62,000 ahead of crypto exchange Coinbase’s IPO, with renewed institutional interest powering the latest leg higher.

The main event on investors’ radar on Tuesday will be US consumer price index inflation data, due at 8.30 a.m. ET.

Predictions of higher growth and inflation have already caused a spike in bond yields, which have in turn weighed on the fast-growing parts of the stock market like technology shares, which look relatively less attractive when yields rise.

Analysts expect Tuesday’s data to show US CPI inflation rose to 2.5% in March from 1.7% in February.

Inflation “has emerged as a key focal point for markets given the debates surrounding inflation and its implications for monetary policy moving forward,” strategist Jim Reid at Deutsche Bank said.

“Indeed, part of the reason that markets have brought forward their expectations for Fed rate hikes is based around rising inflation expectations that they think the Fed might have to rein in.”

Karen Ward, JPMorgan Asset Management’s chief European strategist, has said she thinks inflation could average 3% over the next 10 years, thanks in part to huge amounts of pent-up savings.

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

Bond yields climbed on Tuesday morning, with the yield on the key 10-year US Treasury note rising 1.5 basis points to 1.691%. Yields move inversely to prices.

Investors will also be keeping an eye on 30-year US Treasury auctions, after 3- and 10-year sales attracted solid demand.

Oil prices edged higher, with Brent crude up 0.4% to $63.54 a barrel and WTI crude 0.3% higher to $59.87 a barrel.

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Wall Street and Main Street are both scared of inflation, and how the US economic recovery will hit their wallets

Wells Fargo ATM
Banks large and small, both national and regional, are seeing increased interest in digital and contactless services, as the coronavirus pandemic has forced consumers to rethink the kind of banking interactions they’re comfortable having.

  • Americans of varying backgrounds are growing increasingly concerned of rampant inflation.
  • Google searches for “inflation” reached a record high this week, according to Deutsche Bank.
  • Surveyed fund managers now see high inflation as riskier to markets than the pandemic, BofA found.
  • See more stories on Insider’s business page.

Forget the pandemic. Inflation is the new issue haunting Americans, on Wall Street and Main Street alike.

Celebrations over vaccine approvals and falling COVID-19 case counts are giving way to concerns over just how quickly the economy will recover – and what that means for prices.

New stimulus signed earlier this month promises to send hundreds of billions of dollars directly to Americans and supercharge consumer spending. And shortly afterward, the central bank underscored that it will support a strong recovery this year, as the Federal Reserve reiterated that it plans to maintain ultra-easy financing conditions at least through next year.

The potent combination of monetary and fiscal support has many fearing a sharp jump in inflation. The eventual reopening of the US economy is expected to revive Americans’ pre-pandemic spending habits. Yet an overshoot of expected inflation could spark a cycle of increasingly strong price growth that leaves consumers with diminished buying power.

Worries of such an outcome are shared among both the investor class and the general public. Google searches for “inflation” surged to their highest level since at least 2008 last week, according to research by Deutsche Bank Managing Director Jim Reid. Dovish investors might highlight that similar spikes emerged after the financial crisis, but hawks can point to the unprecedented scale of pandemic-era relief for why today’s situation stands out, Reid said in a note to clients.

“Whether or not inflation ever materializes there is a rational reason why this time might be different. That’s reflected in the increased attention on inflation,” Reid added.

The theme that this time might be different was echoed by a UBS team led by Arend Kapteyn, who wrote in a March note that “pandemic price movements have been unusually large … and are historically difficult to model/predict.”

More recently, a survey from data firm CivicScience shows 42% of adults being “very concerned” about inflation, according to Axios. That compares to just 17% saying they’re “not at all concerned.”

Inflation worries investors more than Covid

Also, institutional investors are shifting their focus from the pandemic to the risk of rampant inflation. Higher-than-expected inflation is now the biggest tail risk among fund managers, according to a recent survey conducted by Bank of America, higher even than the pandemic itself. Snags to vaccine distribution fell from the top of the list to third place, while a potential bond-market tantrum was the second most-feared risk.

To be sure, younger Americans seem less perturbed. The gap in inflation expectations between the baby boomer generation and millennials is the widest its ever been, a team of Deutsche Bank economists led by Matthew Luzzetti wrote earlier this month.

The disparity is likely a product of vastly different circumstances, according to the team. Older investors lived through the “Great Inflation,” a period from the mid-1960s to the early 1980s during which inflation surged and forced interest rates to worrying highs.

Younger Americans have only known a quarter-century of inflation landing below the Federal Reserve’s 2% target, and millennial investors could have a massive influence on whether inflation expectations and real price growth trend higher as the economy reopens, the bank’s economists said.

“With memories of the Great Inflation possibly already lifting inflation expectations for older age groups today, a more material drift higher in expectations likely would require a lift from the younger age groups,” they added.

CivicScience’s newer data suggests that gap is quickly closing. More than half of respondents aged 18 to 24 said they’re “very concerned” about inflation, more than any other age group surveyed. By comparison, just 37% of Americans aged 55 and older said they’re “very concerned.”

Respondents aged 35 to 54 were still the most worried overall, with 48% saying they’re “very concerned” and 36% saying they’re “somewhat concerned,” according to CivicScience.

Kapteyn’s note for UBS highlighted that the conversation around inflation closely resembles the one following the Great Recession: “A decade ago, following the global financial crisis, we were having very similar conversations with clients as we are now.”

At that time, fears of a quick recovery fueling an inflation bubble were similarly strong, “but instead we wound up in secular stagnation,” the bank wrote, referencing the phrase made famous by prominent economist Larry Summers to describe prolonged low growth and low inflation.

This suggests that Americans’ worries about future price growth – including warnings from Summers himself – could starve the US economy of healthy growth and rehash the last decade’s plodding recovery.

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Everything is about to get more expensive. It’s a crucial next step for the US economic recovery.

Walmart coronavirus shopping
Some things are about to get way more expensive for Americans.

  • The US economy is headed for a rebound, but it’ll make things more expensive for Americans.
  • Experts say the economy won’t overheat, but more demand for things like homes and gas will mean higher prices.
  • This is good; inflation like this is a sign of a return to normal and a healthy economic recovery.
  • Visit the Business section of Insider for more stories.

Experts are growing increasingly hopeful the US economy will rebound in 2021, but there’s a price to pay for that. The price of most things, actually. 

A vaccine rollout, a $1.9 trillion stimulus package, and the lift in spending from December’s smaller stimulus paint a promising picture of a roaring, reopened America with lively restaurants, indoor dancing, and crowded stadiums. The economy is set for “stellar” growth as the pandemic subsides, a Bank of America note stated Monday, while boosting its 2021 GDP growth estimate to 6.5% from 6%. 

It could all be the biggest boomtime in the US economy in a generation – but not without a cost.

While history indicates that the US likely won’t see an overheated economy after Biden’s massive stimulus package launches, Wall Street is predicting that certain goods and services might become more expensive.

JPMorgan’s David Kelly wrote in a recent bank note that high demand could “boost prices” across a range of services as the pandemic recedes over the summer, “maintaining inflation at or above” the Federal Reserve’s 2% target. And Mark Haefele, the chief investment officer of global wealth management at UBS, wrote on Tuesday that while fears about persistent rise in inflation are likely “overdone,” his bank is predicting that inflation may spike in the short-term. 

“If pent-up demand emerges, prices could even rise above their pre-pandemic levels,” Brian Rose, senior economist at UBS Global Wealth Management, told Insider. 

This may not be friendly news for Americans’ wallets, but higher prices and a demand for commodities without overheating is a sign of a healthier economy and a crucial next step toward the US’ economic recovery.

Rising Treasury yields – a famous barometer for future inflation – were in evidence this week, and Wall Street economists see signs that everyday essentials like houses, gas, and healthcare are about to get more expensive.

Stronger inflation? Treasurys say so

The Treasury market spoke up this past week. The 10-year yield, after steadily climbing through February, leaped as high as 1.614% on Thursday. The note now trades with its highest yield in more than a year, and President Joe Biden’s stimulus proposal is driving the economic optimism largely reponsible for this bond-market movement.

This matters because Treasury yields, especially in the 10-year, are an indicator of what investors think about the likelihood of inflation. It also matters because it could become a self-fulfilling prophecy.

Investors have largely priced in the $1.9 trillion in relief set to be approved by Democrats in the next few weeks. Supporters argue a large-scale deal is needed to bring the economy back to its past strength. Republicans have voiced concerns that the package will overfill the hole in the economy and spark rampant price growth.

Markets, at least for now, are siding with the Democrats. Expectations for stronger inflation lifted yields as investors demanded higher returns to offset price growth. The continued rotation to cyclical assets – those most likely to outperform during a rebound – saw cash rotate from defensive investments and to riskier plays.

But rising yields have consequences. Since Treasurys serve as a benchmark for the broader credit market, higher yields signal regular payments on consumer loans will soon swing higher. 

Rates on car loans, for example, closely track the 5-year yield, Kathy Bostjancic, head US financial market economist at Oxford Economists, told Insider. Those notes saw outsize selling through the week as investors bet on a sharp but temporary rise in inflation.

Higher yields can be the canary in the coal mine for commodity prices. Treasurys reveal how investors expect the economy to perform in the future, and those expectations can influence current spending activity. Since commodity markets focus so much on contracts for future sales and purchases, yields influence those forward price curves.

“Heating oil and natural gas could perhaps be a problem,” Bostjancic said.

To be sure, yields are far from flashing warning signs of rampant inflation. Real yields, which subtract inflation from bonds’ nominal yields, are still negative across all maturities. Though the 10-year yield sits near one-year highs, negative real yields suggest investors aren’t yet fearful of uncontrollable price growth.

In fact, real yields began turning negative in 2019, well before the pandemic roiled the US economy. The recent uptick in yields is a healthy development, but the pace risks shocking the financial system at a critical turning point, Bostjancic said.

“The bottom line is the 10-year and the yield curve could have a ways to run, and that’s not necessarily negative,” she said. “But if it happens too rapidly, then it can be destabilizing. It could choke off this nascent recovery before it gets going.” 

Homes, gas, and healthcare

So, what does this all mean for Americans’ wallets?

Well, the answer largely depends on what Americans want to spend money on the most. A UBS note this week predicted that largely looks like entertainment, personal services, and education – all key drivers in the experience economy.

“The biggest price increases are likely to be seen as a rebound to normal levels in those services that have been hit hardest [by the] pandemic,” Rose said, citing airfare and hotel stays as examples.

Gas, too, is going to get expensive. A recent Jefferies note revealed the energy sector has already seen a 23.6% increase in CPI, a bigger uptick than any other industry, as cars increased in popularity during the pandemic. Oil prices increased from $40 per barrel last summer to nearly $60 per barrel at present and will likely stay that way through 2021, per the JPMorgan note. 

A pandemic, naturally, has also driven health spending up. The healthcare sector has seen a 14.7% increase in CPI, per Jefferies, signaling that Americans will have to pay even more for health care than they already are. 

Then, there’s housing. The market has been booming, but buying a house has become more expensive. Interest rates hit a historic low in 2020, but the higher treasury yields signal that may be about to change. As of Thursday, mortgage rates climbed back to their highest level since August. 

Mortgage lenders will hike up rates for borrowers to compensate for higher yields as they trade mortgage-backed securities on the bond market. “The market is looking out two or three years and thinking that rates are going to rise,” Todd Johnson, a division manager in Wells Fargo’s mortgage unit, told The Financial Times.

More expensive, but in a good way

Since price increases will be driven by stronger demand, Rose said, it’s an “encouraging sign that the impact of the pandemic is waning and life is returning to normal.”

The Treasury market’s latest moves suggest the Democrats’ stimulus package will prompt a sharp but temporary rise in price growth. Where inflation settles in the long term depends on how well the labor market heals, Seema Shah, chief strategist at Principal Global Investors, told Insider.

The Fed has indicated it won’t raise rates until it sees progress toward full employment. Once inflation runs hot for a period and unemployment declines, the central bank will move toward tamping down on inflation with higher interest rates. 

Judging by the Treasury market, nobody expects the US to face runaway price increases, Shah said.

“The market is saying growth is going to be higher, therefore labor-market slack is going to disappear a lot quicker than people were anticipating,” she said. “And therefore the Fed will actually hike earlier than expected, and by hiking earlier than expected, we’re not going to see inflation take off.”

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Pimco says a $1.9 trillion stimulus could push US growth to 7.5% this year – a rate not seen since the 1950s

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President Joe Biden has pushed a $1.9 trillion stimulus plan

The US economy could grow by 7.5% in 2021 – a rate not seen since the 1950s – as a result of President Joe Biden’s $1.9 trillion stimulus package, analysts at investment giant Pimco said in a note on Wednesday.

Pimco predicted that although this rapid growth would push up inflation to above 2% over the “next several years”, it is unlikely to cause price rises to spiral due, in part, to the reduced bargaining power of workers.

Pimco head of policy Libby Cantrill and economist Tiffany Wilding said they expected the eventual stimulus package to be close to the $1.9 trillion size that President Biden is seeking.

They said the legislation’s focus on enhancing social safety net provisions such as unemployment benefits, coupled with direct support to households and businesses, “boosts the near-term growth outlook.”

Cantrill and Wilding added that the size of the package may also help to cushion the blow to the economy should any problems crop up, such as a slower-than-expected vaccination program.

They upped their growth prediction for the US economy in 2021 to between 7% and 7.5%, more than making up for the 3.5% contraction in 2020.

A 7.5% expansion would be the strongest since the early 1950s, although the US saw growth of more than 7% in 1984.

Rising growth expectations have troubled financial markets lately, however, as they have led to higher bond yields. This has made stocks look less attractive and pulled down the tech-heavy Nasdaq index this week.

The Pimco note said the rapid economic growth and rise in employment “doesn’t have huge implications for our inflation outlook.” Cantrill and Wilding said this was in part because a decline in labor unions means workers are now less able to achieve wage rises.

Nonetheless, Pimco expects US inflation to rise to 2% in 2021 before dropping to around 1.5% by the end of the year. It then expects inflation to gradually accelerate to a range of 2.2% to 2.5% over the course of the next several years.

“It’s not surprising that more investors are worried about another inflationary accident,” Cantrill and Wilding said.

Yet they added: “While a period of above-target inflation has become more likely, in our view, the likelihood of a self-reinforcing inflationary process similar to what happened in the 1970s is still relatively low.”

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