Federal Reserve officials responded on Thursday against concerns raised by two prominent economists – Lawrence H. Summers, the former Treasury secretary, and Olivier J. Blanchard, a former chief economist at the International Monetary Fund – that large government spending could overheat the economy and send inflation shooting higher.
These warnings made headlines and sparked debate in the past two months, as the details of the federal government’s $ 1.9 trillion pandemic relief bill were gathered. Summers, in particular, has kept them up to date since the legislation passed, saying it was long after big spending packages last year. He recently called the fiscal policy approach “less responsible” in 40 years, while predicting that he had a chance in three to precipitate higher inflation and perhaps stagflation, or a chance in three to get the Fed to raise rates and push the economy into recession.
But two Fed leaders, who are tasked with using monetary policies to keep inflation stable and contained, gave little credit to those fears on Thursday. Richard H. Clarida, the vice president of the central bank, and Charles Evans, the president of the Federal Reserve Bank of Chicago, answered specific questions about Summers and Blanchard’s notices.
“Both rightly pointed out that the United States has a lot of fiscal support this year,” said Clarida in a webcast from the Institute of International Finance. “I disagree is whether or not it will pose a persistent and long-term upside risk to inflation, and I don’t think so.”
Clarida said there is plenty of room for the economy to recover – some 9.5 million jobs that were lost during the pandemic have still disappeared – and that the effect of government spending on humanitarian aid would lessen over time. He also said that while spenders have pent-up demand, there has also been a pent-up supply because the service sector has been closed for a year.
“At the Fed, we are paid to be attentive and attuned to the risks of inflation, and we will be,” said Clarida. But he noted that analysts have not seen “undesirable upward pressure” on inflation over time.
Evans told reporters on a phone call that he was not sure what “overheating” – the danger that leading economists warned about – really meant.
“First of all, there is talk about this is the best way to spend money,” he summarized, adding that he had nothing to say about it. “But then there is something like, ‘Oh, this is so much that it will exceed potential output, and there is a risk of overheating and then inflation.'”
He continued: “What is the definition of overheating? It is a great word, it evokes all kinds of images, but it is as if the potential production was always a strange concept anyway. Can production be too high? “
Evans has been concerned for years about the fact that inflation is too warm, instead of rising too much. Super weak price pressures can cause problems by risking price drops – which encourage savings and hurt debtors – and by depriving the Fed of space to cut interest rates in times of trouble.
“I kind of remember the 70s, too,” a decade when inflation skyrocketed and got out of hand in America, Evans said. “We are not in the 70s. We had trouble raising inflation.”
Inflation has been weak in the United States and in advanced economies in general for the past two decades. To try to prevent this from becoming a bigger problem, the Fed has been working to “anchor” consumer and market expectations to keep inflation from falling. The central bank announced last year that it would start targeting annual price gains of 2% on average over time, allowing for periods of greater increases.
Still, no Fed policymaker wants inflation to rise suddenly, eroding consumer spending power. If that happened, the Fed might have to raise interest rates quickly to slow the economy, taking people out of work and possibly causing a recession. That’s what Summers and Blanchard are warning about.
Frequently asked questions about the new stimulus package
Stimulus payments would be $ 1,400 for most recipients. Those who are eligible would also receive an identical payment for each of their children. To qualify for a total of $ 1,400, a single person would need an adjusted gross income of $ 75,000 or less. For heads of household, the adjusted gross income must be $ 112,500 or less, and for couples filing jointly, that number must be $ 150,000 or less. To be eligible for a payment, a person must have a Social Security number. See More information.
Buying insurance through the government program known as COBRA would temporarily be much cheaper. COBRA, for the Consolidated Omnibus Budget Reconciliation Act, generally allows someone who loses a job to purchase coverage from the former employer. But it is expensive: under normal circumstances, a person may have to pay at least 102% of the cost of the premium. According to the relief bill, the government would pay the entire COBRA premium from April 1 to September 30. A person who qualifies for new employer-based health insurance elsewhere before September 30 would lose eligibility for free coverage. And someone who quit their job voluntarily would also not be eligible. Read More
This credit, which helps working families to offset the cost of caring for children under 13 and other dependents, would be significantly expanded over a single year. More people would be eligible and many recipients would have a greater chance. The invoice would also make the credit fully refundable, which means that you could charge the money as a refund even if your invoice was zero. “This will be useful for people at the bottom end” of the income scale, said Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting. See More information.
There would be a big problem for those who already have debts. You would not have to pay income tax on forgiven debts if you qualify for loan forgiveness or cancellation – for example, if you have been on an income-based repayment plan for the required number of years, if your school has defrauded you or if O Congress or the president wipe $ 10,000 off the debt of a large number of people. This would be the case for debts forgiven between January 1, 2021 and the end of 2025. Read more.
The project would provide billions of dollars in rent and public service assistance to people who are struggling and at risk of being evicted from their homes. About $ 27 billion would go to emergency rental assistance. The vast majority would replenish the so-called Coronavirus Relief Fund, created by the CARES Act and distributed by state, local and tribal governments, according to the National Low Income Housing Coalition. That adds to the $ 25 billion in assistance provided by the aid package approved in December. To receive financial assistance – which could be used for rent, utilities and other housing expenses – families would have to meet several conditions. Family income cannot exceed 80 percent of the area’s average income, at least one family member must be at risk of homelessness or housing instability, and individuals would have to qualify for unemployment benefits or have experienced difficulties (directly or indirectly) because of the pandemic. Assistance can be provided for up to 18 months, according to the National Low Income Housing Coalition. Low-income families who have been unemployed for three months or more would have priority for assistance. See More information.
The $ 1.9 trillion measure that the Biden government introduced in Congress added to a $ 900 billion aid package enacted in December and a $ 2 trillion package last March.
Mr. Blanchard, in a March 5 post on Twitter, compared the new government spending with a snake swallowing an elephant: “The snake was very ambitious. The elephant will pass, but perhaps with some damage. “
He said more recently that “I had no idea what happens to inflation and rates”, but that there is a lot of uncertainty and that things “can go wrong”.
Summers, who led the Treasury Department from 1999 to 2001, wrote in a February 4 column in the Washington Post that, while it was extremely uncertain, “there is a chance that macroeconomic stimulus on a scale closer to World War II levels Worldwide than normal, recession levels will trigger inflationary pressures of a kind that we haven’t seen in a generation. ”
He said in an interview with Bloomberg Television last week that “we are taking huge risks”.
But Fed officials do not think that large government spending will be enough to rewrite the story of low world inflation. And if it triggers a pickup a little faster, that may be a welcome development.
Clarida acknowledged that price gains are likely to increase in the coming months, but said that she expects most of this “to be transitory” and that inflation will return to “or perhaps just above 2%” in 2022 and 2023.
“This result would be fully consistent with the new structure that we adopted in August 2020,” he said.