How a sweeping US infrastructure plan might spur financial havoc in China
- Economists debate whether proposed US$2 trillion infrastructure programme would cause inflation at home that could be exported
- ‘I would be surprised if the Fed wasn’t compelled to raise rates by sometime next year,’ one analyst says.
As the Biden administration pushes its proposed US$2 trillion domestic infrastructure programme forward, it is sparking debate about the programme’s potential to wreak havoc in emerging markets.
If passed, the total amount of extra capital pumped into the US economy in relief and recovery packages since March 2020 – at the onset of the Covid-19 pandemic – would swell to US$7.2 trillion, the largest such capital infusion since World War II.
Policy watchers agree that the new plan would help upgrade ageing bridges and roads for the 21st century, as well as fight climate change. But they can’t agree on whether excess liquidity would cause large amounts of capital to rush in and out of emerging markets like those of China, Brazil, and Mexico, distorting them.
The issue comes down to whether the proposed infrastructure programme – the American Jobs Plan – will trigger inflation and price increases in the US, which might then cause capital flows in other countries to fluctuate sharply.
Last month, Federal Reserve Chairman Jerome Powell said the Fed did not expect to raise interest rates until 2023. But since then, inflation indicators have ticked up.
Consumer prices, a key gauge for inflation, rose 2.6 per cent in March from the year earlier, the highest uptick since August 2018, the Labour Department reported last week.