Massive federal spending meant to blunt the coronavirus’s economic impact could have long-term costs, experts say — meaning those stimulus checks might not be free money after all. Congress’s unprecedented stimulus measures coupled with the Federal Reserve’s aggressive efforts to shore up the economy could drive up inflation in the coming years, leaving Americans with …
Massive federal spending meant to blunt the coronavirus’s economic impact could have long-term costs, experts say — meaning those stimulus checks might not be free money after all.
Congress’s unprecedented stimulus measures coupled with the Federal Reserve’s aggressive efforts to shore up the economy could drive up inflation in the coming years, leaving Americans with less purchasing power over time, according to reports.
Lawmakers have approved about $4 trillion in coronavirus-related stimulus spending, according to the Committee for a Responsible Federal Budget, while the Fed has injected trillions more into the financial markets and cut interest rates to near zero.
Those efforts have been aimed at warding off deflation, a phenomenon in which consumers reduce their spending and prices for goods and services fall, financial educator Sahil Bloom told CNBC.
But that deflation could turn into inflation — which drives up consumer prices and reduces the power of the dollar — if the government spending frenzy continues “unchecked,” according to Bloom.
“If we remain in an environment of record-breaking deficit spending alongside zero interest rates, it is certainly one possible outcome here that we would see a world of rising inflation and high unemployment,” Bloom, a vice president at Altamont Capital Partners, told CNBC.
The likelihood of another large-scale spending bill to follow up the $2.2 trillion CARES Act combined with the Fed’s whatever-it-takes approach to monetary policy is likely to speed up inflation going forward, Morgan Stanley economists reportedly contend.
“As the rebound in the economic indicators continue to gather pace, we think we have left behind the worst of the disinflationary pressures and that reflation is already under way,” the bank’s economists wrote in a note to clients last month, according to MarketWatch.
The Fed recently shifted its policy to allow for higher inflation, but the move was aimed at helping the economy add jobs for as long as possible. The central bank signaled Wednesday that it would keep interest rates near zero until inflation is on pace to “moderately exceed” its target rate of 2 percent.
While Congress has been deadlocked for weeks on a new fiscal stimulus package — which could include another round of $1,200 direct payments to taxpayers — economists say more spending is needed to keep the economy on the path toward recovery from its record collapse in the spring.
“Even in the case of the CARES 2.0, notwithstanding the split between policy makers on the size of the package, both sides of the aisle have continued to express the need for supporting the economy, which in turn has meant that the final size of the package is likely to be bigger (at around US$1.5-US$2 trillion, compared to initial expectations of US$1 trillion), not smaller,” the Morgan Stanley economists reportedly said.
With Post wires