Biden’s bold fiscal package gets over the line
The Senate and the House of Representatives approved the Biden Administration’s USD 1.9 trn fiscal package, meaning its signing into law is imminent. Coming on top of the USD 900 bn stimulus approved in December, the package arrives just as the US economy is on the verge of full reopening.
The question remains how much of the package will be spent now by US consumers (ie., the ‘fiscal multiplier’). Recent economic research suggests that fiscal multipliers for such direct demand-boosting go from 0.3x to 1.5x of GDP. We are tempted to believe in multipliers at the lower end of this range, and therefore smaller than some observers assume. Yet, however moderate the fiscal multiplier may be, the stimulus is massive, and there is a good chance that households will spend at least some of the USD1,500 bn of savings they had already accumulated last year. But there is a difference between a strong rebound in consumer spending and economic overheating.
Overall, our current 5.6% growth forecast for the US in 2021 faces upside risk. This is because the US economy could fully open sooner than expected and because consumers may run down accumulated savings more quickly than currently projected if confidence picks up this spring after several months in the doldrums. Our 2021 core PCE inflation forecast is 1.7% as we expect limited pass-through from the recent sharp rise in commodity prices to core inflation, via wages. There is still plenty of labour-market slack and we still see no tangible de-anchoring of medium-term inflation expectations.
The package probably does not address supply-side issues enough, although President Biden hopes to rectify that in a separate infrastructure and green-energy package.
We expect the Federal Reserve (Fed) to stay relatively serene after the latest fiscal boost as it remains committed to its dovish ‘average inflation targeting’ strategy, and we still see no reduction in its monthly asset purchases (quantitative easing) until early 2022. The press conference following the 17 March Fed meeting will be especially worth following for any allusions to potential negative side-effects from rising rates on debt-servicing costs in a highly indebted economy (total private and public debt in the US is now almost 300% of GDP) and also on the crucial housing sector via the benchmark 30-year mortgage rate (the rate recently rose above 3.2%).