Opinion | In an overstimulated US economy, will inflation really be transitory?

Name: China ‘closing in fast’, says US President Joe Biden in first address to Congress
Uploaded: 2021-06-12T17:30:00.000Z
Duration: 3 min 53 s
Description: China ‘closing in fast’, says US President Joe Biden in first address to Congress

Thanks to government support, many are being paid not to work. There are fears the Fed has distorted economic activity and laid a foundation for high inflation

As the US has had no significant inflation for two decades, most Americans are unaware how debilitating it can be

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A hat store advertises that it is hiring in Annapolis, Maryland. Between stimulus cheques and expanded unemployment assistance, many workers are being paid at a rate of US$35,000 annually not to work. Photo: AFP

Barry Wood

Published: 1:30am, 13 Jun 2021Updated: 1:30am, 13 Jun 2021

US Federal Reserve chairman Jerome Powell is staking his reputation on the current spike in inflation being transitory. Powell and his colleagues on the Federal Open Market Committee believe that the US economy is still reeling from the Covid-19 pandemic and requires continued, unprecedented monetary and fiscal support.

Powell is undeterred by first-quarter annualised GDP growth of 6.4 per cent, pointing instead to the economy being 7 million jobs short than before the pandemic.

Accordingly, the Fed is keeping the monetary spigots wide open, holding short-term interest rates near zero and ballooning the money supply by buying US$120 billion of securities every month. Powell remains committed to holding the short-term Fed funds rate at the current emergency level until 2023.

But could Powell be wrong? Yes, of course, proclaim a growing chorus of economists, led by Larry Summers, the Treasury secretary under Bill Clinton who was once considered for the position Powell occupies.

Summers fears the economy is overheating and coming to the boil. Already, consumer prices are up 4.2 per cent year on year, the fastest pace in 12 years and two percentage points above the Fed’s target. With the Biden administration spending US$4 trillion in stimulus, says Summers, it is pursuing “the least responsible” fiscal policy in four decades.

03:53

China ‘closing in fast’, says US President Joe Biden in first address to Congress

In main street America, help-wanted signs abound whether in Des Moines, Rockville or Racine. There’s little doubt the economy is distorted and overstimulated. Warren Buffett, the 90-year-old sage of Omaha, says 85 per cent of the economy is “running in super high gear”.

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