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Wall St: Stimulus Won’t Spark Runaway Inflation

Trisha Sebastian



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Will the infusion of a $1.9 trillion stimulus program cause runaway inflation? If you ask President Joe Biden and the Democrats that the economy’s loss requires spending $2 trillion. Meanwhile, Republicans say that the economy can recover with smaller amounts. Flooding the markets with too much money can lead to runaway inflation. 

RELATED: House Dems Approve $2000 Stimulus Checks

Wall Street Sides With Democrats

Who’s right and who’s wrong depends on who you ask. Recently, Wall Street joined the debate. Investment banks did the numbers and concluded more money is better than less. They downplayed concerns about runaway inflation. With the Dems moving forward to get the relief package aid, financial firms aren’t raising any objectives. 

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As big banks presented their own projections, they arrived at a consensus. The benefits of bigger spending will outweigh the risks. After years of weak inflation and a year of economic recovery mired in the mud, Wall Street is ready to welcome the infusion of stimulus money yet again. 

Bank of America: Profits, not Inflation 

As far as stocks go, investors have yet to worry about inflation caused by the stimulus. The stock market is sitting very pretty right now, and people are injecting money into stocks that will bounce back soon as the economy reopens. More people are too preoccupied with potential profits to worry about inflation. 

The market is “painting a story of optimism,” according to Bank of America US economics head Michelle Meyer. “Market participants are looking for stronger economic growth to push up inflation but not trigger Fed tightening too quickly. It is a difficult balance, but so far highly successful,” she noted. BofA predicts a GDP rate of 6% this year and 4.5% in 2022. This rate is just to lift the economy, and stimulus infusion can speed up the growth rate.  gross domestic product growth of 6% in 2021 and another 4.5% next year. This kind of expansion would fill the hole in the economy by the end of 2022, and additional stimulus would further accelerate growth, the economists said. The economy’s chances of overheating become a matter of how much. 

UBS: Gradual Rise of Inflation

UBS economists led by Alan Detmeister say the $1.9 trillion packages might be excessive, but it will get the job done. Compared to a scenario without any new stimulus aid, the inflation rate difference is half a point. Modest inflation can cause a gradual price growth in the first half of this year. UBS sees a growth rise of 1.8% in 2022 in core personal consumption expenditures and 1.9% in 2022. the following year, still trending below the central bank’s goal. 

UBS’s forecast doesn’t yet account for the currently proposed stimulus measure. However, they see the current package “poses a small upside risk” and probably won’t lead inflation to exceed 2% soon. If the economy rebounds as predicted, inflation can overshoot 2%, but only after 2023.

Goldman Sachs: Understated CBO calculations 

Goldman Sachs Economists led by Jan Hatzius looked at different measures. Instead of inflation expectations, they looked at the economy’s output gaps. The metric depends on the maximum potential GDP estimates sent out by the Congressional Budget Office. Goldman Sachs thinks that the estimates remain understated. The CBO’s view features endpoint bias, seeing short-term changes as a reversal of a long-term trend.” Both on the way down and on the way up, actual GDP was, therefore, a leading indicator for estimated potential GDP, indicative of endpoint bias,” the economists added.

Overall, Goldman projects the output gap to currently be more than twice the size of the CBO’s estimate. This means that they think that “inflation risk remains limited,” even with overachieving growth estimates. 

Deutsche Bank: Too Soon To Tell

Deutsche Bank’s Chief International Strategist Alan Ruskin issued a report Friday. With inflation usually slowing growth by up to two years, Ruskin wrote that inflation fears won’t reach a definite conclusion within the year. “A few soft US inflation numbers will not sound the all-clear. A few strong US inflation numbers will however elevate concerns. There is then some inherent asymmetric skew to how the markets will think about inflation risks going forward,” he wrote. 

In addition, Ruskin noted this is “an unusual moment in macrohistory” where “the ‘stars’ as they relate to inflation fears have aligned.” Economists from different disciplines seem to agree that more rather than less inflation risk is approaching. These include the strongest money supply in history, the strongest predicted growth in 70 years, and the closing of large negative output gaps. In addition, now is the time for very accommodating financial conditions.

Watch the Yahoo Finance video where senior columnist Rick Newman looks at the potential dangers of too much stimulus in the economy:

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