Washington—US President Joe Biden’s stimulus program is being hailed as both boosting domestic growth and spurring the global recovery, but the IMF warned that policymakers will need to be alert to risks posed by the massive spending as well as low interest rates.
The package, which Biden signed into law on Thursday, will inject $1.9 trillion in aid into the pandemic-damaged economy by funding small businesses, extending unemployment benefits that were due to expire in days, and sending direct payments of as much as $1,400 to many Americans starting this month.
That spending will expand US GDP by five to six percent over three years, according to the IMF’s preliminary estimates.
And higher demand will help other countries sell more products to American consumers, the fund’s spokesman Gerry Rice told reporters Thursday.
“We see potentially significant positive spillovers in terms of global growth,” he said. “Most countries should benefit from stronger US demand… so this will help global growth and recovery.”
However, he cautioned that with low interest rates, policymakers worldwide should be on the alert for a sudden shift in borrowing costs.
That has been a growing concern for financial markets in recent weeks as accelerating COVID-19 vaccine rollouts offer hope of a rapid recovery, but also sparked fears that growth could ignite an inflationary spiral that would force the Federal Reserve to raise interest rates sooner than expected.
The concerns have sent stock markets reeling in recent sessions, especially tech shares, which are more likely to be hindered by rising lending rates.
Fed Chair Jerome Powell has repeatedly tried to calm financial markets, saying that policymakers have no intention of reining in stimulus or raising the benchmark interest rate until inflation is holding solidly above two percent and employment has recovered.
He acknowledged that inflation could jump this year compared to the depressed rates during the pandemic restrictions in 2020, but said those price spikes are likely to be “transitory.”
Brian Deese, director of the White House National Economic Council, said the administration is focused on the recovery but monitoring inflation.
“This is a risk, like many, that we are going to constantly monitor and keep our eye on,” Deese said on CNN when asked about one private forecast that projects 2.8 percent inflation this year.
Some economists including former Treasury secretary Larry Summers and former IMF chief economist Olivier Blanchard cautioned that the rescue package could add too much fuel to the economy.
But the White House has downplayed those risks, and Deese said “we still have enormous slack in the economy.”
The IMF, too, has largely dismissed inflation worries, saying the rate this year could increase to 2.25 percent—which is unlikely enough to trouble the Fed.
But Rice said the risks mean the Federal Reserve and other major central banks must communicate “clearly” about their outlook and policy plans “to avoid any unwarranted tightening of financial market conditions.”
