US | Stimulus may heat up the economy, but won’t burn it

The debate around the economy’s need for Biden’s $1.9tn American Rescue Plan (ARP) is heating up. A few prominent economists recently argued that while relief funding is important and some stimulus is needed, the package could lead to spiraling inflation, financial market instability, and reduced fiscal space for further stimulus. We disagree on all three fronts. Instead, we see strong reasons why the dire outlook and fear of the unknown are overstated.

What you will learn from this report:

• First, while greater economic growth will lead to the longest inflation stretch above 2% since before the financial crisis, inflation is unlikely to sustainably breach 3%.
• Second, while the US economy will recoup its pre Covid size in Q2 and real GDP could surpass potential output in H2, we expect several sectors to remain well below their potential for the foreseeable future.
• Third, while we acknowledge that higher inflation is a serious risk against which financial markets should hedge, financial instability concerns appear overblown.