Is your stimulus really necessary?

The US Department of Commerce announced this morning that real GDP grew at a 6.4 percent annualized rate in the first quarter of 2021. That's up from the 4.3 percent growth rate posted in the final quarter of 2020, and the fastest pace seen in any quarter since 1984. Real GDP for the quarter was only marginally below the level seen just before the start of the pandemic. With COVID restrictions being eased across the country, real GDP will undoubtedly post a new all-time high in the current quarter. 

The news on growth comes just a day after the Federal Reserve kept its rate target at historically low levels and committed to maintaining the pace of quantitative easing. It acknowledged that "the recovery has progressed more quickly than generally expected" since the beginning of the year. The Fed remains committed to maintaining its current policy settings until "inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent".  Unlike the Bank of Canada in its own policy update last week, the Fed has given no indication that it is even considering accelerating its move away from the current highly accommodative stance. 

With the economy growing quickly and monetary policy stimulative, is there any need for further support on the fiscal side? The ink is barely dry on President Biden's $ 1.9 trillion "American Rescue Plan", a COVID-related package that is now providing financial support directly to US households. Now, as it passes the traditional "first hundred days" marker, the administration is proposing close to a further $4 billion in new spending, in the form of the "American Jobs Plan" and the "American Families Plan". 

The proposed new measures, supposedly to be financed by higher taxes on corporations and wealthy individuals, are probably not best looked at primarily as stimulus to help the economy back to its feet. Rather, it seems President Biden is using the pandemic as cover to force through a "once in a generation investment" that would stand next to no chance of getting through Congress in more normal times. Even in today's highly unusual circumstances, the chances of spending on anything like the scale proposed getting passed into law seem very limited. The Republicans are predictably up in arms at both the spending plans and the tax hikes, and there are plenty of nervous voices to be heard on the Democrat side. 

Even if the real goal is not stimulus per se, there is no doubt that new spending on this scale will be massively stimulative. The additional Treasury debt may not be a problem in itself, but with the economy already growing at a breakneck pace and monetary policy set to remain highly accommodative, inflationary risks are bound to grow. The stock markets seem to like all this, but bond markets may start to tell a different story.