Publications /
Opinion

Back
The size of Biden’s fiscal package
February 22, 2021

The monetary policy report submitted by the Board of Governors of the Federal Reserve System to the U.S. Congress on Friday Feb. 19 showed that the Fed’s members have improved economic growth expectations for 2021 and 2022, expect lower unemployment rates. Meanwhile, only two of the 18 participants projected PCE (personal consumption expenditures) inflation to (slightly) exceed the 2% that serves as the longer-run objective for the monetary policy regime.

In this context, is there some justification for fears on the part of some that the $1.9 trillion fiscal package sent to Congress by the Biden government, with approval expected by mid-March, carries the risk of bringing too much stimulus to the country's economy, which is already recovering? Could the package cause inflation spikes and, consequently, a reversal of the looseness in monetary policy, with an increase in interest rates causing shocks to highly indebted non-financial companies?

There are even those who suggest the recent slight rise in longer-term interest rates on Treasury debt securities already reflect such an expectation. Last week, yields on 10-year bonds reached 1.3%, after being slightly above 0.9% at the beginning of the year. Several analysts pointed to yields implicit in 10-year protected-against-inflation government securities as embedding inflation expectations at around 2.2%, the highest since 2014. Figure 1 shows recent spikes in 5-to-10-year-forward inflation compensation.

 

Figure 1: 5-to-10-year-forward inflation compensation

5-to-10-year-forward inflation compensation

Source: Board of Governors of the Federal Reserve System, February 19, 2021.

 

When added to previous packages since the beginning of the pandemic crisis, amounts equivalent to 13% of GDP will be reached, something unprecedented since the Second World War. It was very striking that the concern about excess has been expressed by renowned economists—including Lawrence Summers and Olivier Blanchardwho have always called for fiscal policies to not leave the task of recovery entirely on the shoulders of monetary policy.

Even before considering the Biden package, the U.S. Congressional Budget Office had already projected the country's GDP as exceeding the pre-pandemic level this summer. If the Trump administration's second package was enough, the impact of the Biden package on demand (9% of GDP) would be beyond what is necessary for the return to potential GDP. Morgan Stanley Research has forecast a 6.5% GDP growth rate for 2021 and a trajectory even above the pre-COVID-19 path (Figure 2).

 

Figure 2 – US real GDP (rebased Q4 2019 = 100)

Figure 2 – US real GDP (rebased Q4 2019 = 100)

Source: Gille, C., Financial Times, February 18, 2021.

 

The fiscal package has components that need to be differentiated. On the one hand, it would provide an amount of resources that could be considered as part of the extraordinary public expenditure related to the pandemic, and which does not correspond to a macroeconomic recovery policy, even though it will have an impact on aggregate demand. This includes money to speed up the vaccination campaign, including spending by subnational entities, and reinforcement of unemployment insurance. On the other hand, items pointed out as excessive and poorly focused include another round of checks sent directly to households, as was done last year.

Paul Krugman, for his part, has expressed less concern about the potential excess aggregate demand that would be be brought about by such checks, which would not be focused on the lower levels of the income pyramid, judging by their diversion to precautionary savings by households last year. Former U.S. Treasury Secretary Larry Summers reiterated that, even if this is the case, the corresponding fiscal space should have been reserved for some future package that is expected to come for investments in infrastructure and “green recovery“.

However, two relevant aspects must be taken into account. First, according to Treasury Secretary Janet Yellen, it would be better to run the risk of excess than insufficiency.

In addition, the Federal Reserve's new monetary policy regime puts the 2% inflation target as an average, not as a ceiling forcing monetary policy to act to prevent it in advance. After a long period of inflation below 2%, even in years with low unemployment and interest rates on the floor, monetary authorities can afford to wait some time with above-average inflation until they are compelled to pull the brake. The report presented to Congress Feb. 19 says this explicitly.

 

RELATED CONTENT

  • September 24, 2019
    En pleine transition ordonnée de son régime de change, sous l'autorité bienveillante du Fonds monétaire international (FMI), le Royaume du Maroc est un exemple très concret des avantages et des inconvénients des deux régimes de change dominants ces dernières décennies/change fixe et change flottant /. L’objet de cette note est de rappeler, tout d'abord, les fondamentaux économiques des deux systèmes et leur environnement historique (I). Ensuite, à la lumière de ces fondamentaux, pré ...
  • Authors
    Satyandra Nayak
    August 27, 2019
    Since the Fed’s July meeting, when the Fed Funds Rate had a 0.25% cut, fears about the impact of the US-China trade war on the global economy have escalated. The US yield curve inversion received much attention as a harbinger of a slowdown in the global and US economic outlooks. We approach here whether lights on next monetary policy events can be obtained from reading the minutes of the Fed’s meeting – and of the July meeting of the ECB governing council – released this week. The ...
  • Authors
    Mohammed Germouni
    August 26, 2019
    La création d’instruments financiers à la Conférence de Bretton Woods, à la fin de la Seconde  Guerre mondiale, était une nouveauté pour l’époque et avait sonné la fin du chacun pour soi « monétaire », en jetant les bases d’un système de changes fixes mais ajustables reconnaissant, cependant, et dès le départ, la primauté du dollar de la nouvelle grande puissance. Le Fonds monétaire international (FMI) devant se charger de venir en aide aux pays à la balance des paiements déficitai ...
  • Authors
    Christos Daoulas
    August 22, 2019
    This note approaches the relationship between natural wealth and economic growth, using the case of Sub-Sahara African economies as an illustration. Delving into recent World Bank reports, it highlights how a sustained positive correlation between natural capital and GDP growth happens through the transformation of the former into other forms of assets: produced capital, human capital and other intangible assets. Governance features and the quality of macroeconomic policies are of t ...
  • Authors
    August 19, 2019
    Argentina’s peso tumbled and stocks plunged after last Sunday’s primary elections. The perception of a likely victory of President Macri’s opponents – Alberto Fernandez, and running mate, Christina Fernandez de Kirchner - has sparked a new shift in investor preferences away from peso assets, pressures on the exchange rate, and hikes on sovereign spreads. Unless fears of a return to policies prevailing before Macri are assuaged, the market rout tends to deepen as a negative feedback ...
  • Authors
    August 8, 2019
    Brazil's economic recovery after the deep 2015-16 recession has been the slowest on record, with GDP per capita last year remaining more than 9% below its pre-crisis peak (Chart 1, right side). The IMF's annual report on the country's economy, released two weeks ago, estimated current GDP to be nearly 4% below its potential level, which suggests insufficiency of aggregate demand (Chart 1, left side). On the other hand, as the slow recovery reflects structural factors, it is necessar ...
  • Authors
    Elhadj EZZAHID
    July 19, 2019
    Les recherches sur les sources de croissance de long terme des économies montrent qu’elle dépend plus de la croissance de la productivité que de la croissance des volumes des inputs accumulés. Au Maroc, les résultats disponibles fournissent des évidences sur le rythme très lent de la croissance de la productivité mesurée par la PTF ou le rapport production-travail. Des simulations montrent que seule une augmentation de la PTF permettra d’atteindre une croissance suffisamment élevée. ...
  • Authors
    Matheus Cavallari
    Tiago Ribeiro dos Santos
    July 19, 2019
    Multilateral Development Banks (MDBs) have two financing windows, with different terms, dedicated to low- and middle-income countries. Countries are presumed to cross those windows as their income per capita rises, with middle-income countries (MICs) eventually “graduating” to a non-client status once they reach some criteria. However, due to what may be called “middle-income traps”, such progression toward graduation has been limited to a small number of countries. ...
  • Authors
    Sandiso Sibisi
    July 17, 2019
    Despite considerable effort from the South African government to drive innovation, the investments to date have not reaped the fruits expected by both government and the private sector. I believe that if we are to realise ‘the new dawn’ in economic growth and transformation the state needs to reorganise itself to be an ‘entrepreneurial state’. This paper will proceed firstly by outlining current government action to support innovation, followed by a summary of the overarching recomm ...
  • Authors
    Comité scientifique :
    Ahmed Bousselhami
    Idriss El Abbassi
    Amine Marrat
    Lahcen Oulhaj
    Aziz Ragbi
    Said Tounsi
    June 13, 2019
    L’analyse des mutations qu’a connues l’économie marocaine après la crise économique et financière de 2008, offre l’opportunité d‘évaluer l’orientation des politiques macroéconomiques gérées dans un contexte relativement difficile, mettant à l’épreuve les décideurs publics en matière de politique économique et leur engagement à préserver la stabilité du cadre macroéconomique. Un diagnostic approfondi revient à apprécier la pertinence des choix de politiques macroéconomiques par rappo ...