After 15 months, we are rapidly emerging from the scourge of the coronavirus pandemic. Better days are ahead. While there remains some uncertainty about what the future will be like, there is reason for optimism, at least in terms of economic well-being and opportunity. In this month's letter, Maryland Smith's Bill Longbrake discusses three significant developments, set in motion by the disruptive impacts of the pandemic, which collectively could increase the rate of growth in economic activity, raise the standard of living substantially, and might even contribute to a lessening of income inequality.
Consumer prices soared 4.2% in April and will be up 4.7% or more in May. The Fed was unfazed, dismissing the surprising surge in inflation as transitory. Fed Chair Jerome Powell has emphasized repeatedly that the economy "is a long way" from the Fed's employment and inflation goals, adding "it is likely to take some time for substantial further progress to be achieved." This means keeping interest rates near zero for at least another two years. But with new COVID-19 infections plummeting, vaccinations rising and copious amounts of cash from the federal government burning holes in people's pockets, what if the economy takes off and the recent burst in inflation proves to be anything but transitory? In this month's letter, Bill Longbrake discusses why the Fed is willing to be patient. He says the Fed's patience is the right call, that the inflation scare will abate in time, and that inflation expectations, while they may edge higher, are unlikely to trigger self-fulfilling behaviors. Further, he says, a more preemptive monetary policy, while reducing the inflation threat, would slow a return to full employment.
The sheer size of the American Rescue Plan and the speed with which authorized funds are disbursed and spent will have significant benefits on the U.S. and global economies, but will also pose some risks. In this month's Longbrake Letter, Maryland Smith's Bill Longbrake concludes that the American Rescue Plan will accelerate economic and labor market recovery. However, he cautions, many social and economic processes, which were severely disrupted by the pandemic, will take time to restore. Further, he warns that U.S. stimulus could strain capacities and potentially lead to overheating. While benefits of the package will be enormous, he says, an overheating could create and accentuate significant risk.
Spring has sprung. Vaccinations, a flood of government stimulus, overflowing bank accounts, and low interest rates collectively have paved the way for lives to return to normal. By summertime consumers will be on a spending binge unlike anything witnessed since 1946 and 1947 following World War II. Will the spending frenzy ignite an inflationary spiral? The Fed doesn't think so, but others aren't so sure. In this month's Longbrake Letter, Maryland Smith's Bill Longbrake explores inflation risks posed by a booming economy.
Congress is working to pass the Biden administration's American Rescue Plan, a $1.9 trillion stimulus package designed to address the myriad problems caused by the COVID-19 pandemic. The size of the package, hot on the heels of $900 billion approved by Congress in December, has raised vigorous debate about whether the size of stimulus is too much and might overheat the economy and unleash inflation. In this month's letter, Bill Longbrake explains why he believes that is not a threat. But there is another debate that needs to occur, he writes. Despite copious amounts of cash provided to families, unemployed workers and struggling organizations, the American Rescue Plan doesn't provide long-term solutions for those whose jobs and businesses were permanently destroyed by the pandemic. This omission risks exacerbating the fraying cohesion of our social and political fabric.
As forecasters peer into their crystal balls, there are super optimists, optimists (the consensus), and skeptics. Maryland Smith's Bill Longbrake counts himself among the super optimists. Super optimists expect 2021 will be a boom year with real GDP increasing 6% or more. They expect COVID-19 vaccinations will put an end to the pandemic by the middle of the year. Then, the enormous horde of savings that built up during 2020 and the additional fiscal stimulus likely to flow into the pockets of consumers and businesses during the first half of 2021 will spark a go-for-broke spending binge. Optimists, the consensus, expect 2021 to be a very good year with real GDP growing about 5%, but consumers and businesses are more cautious. Skeptics expect a good year, too, but worry about COVID-19 vaccine distribution bottlenecks and new variants that delay herd immunity.
Maryland Smith's Bill Longbrake looks back at 2020 – a year in which the pandemic changed everything – and looks ahead at this year. Pandemic herd immunity is in sight – and with it boom times. In financial markets, questions are being raised about whether those boom times will ignite inflation. Most expect Inflation and interest rates to stay low for years to come. But it would be imprudent to dismiss the possibility of a fundamental shift that unleashes inflation. The inflation process is like a glacier. Both move slowly. But both are hard to stop. And both can have long-run consequences that are dramatic.