What is the next step for fiscal and monetary policy?

The COVID-19 pandemic has had a significant impact on our national economy. It is no surprise that the ongoing pandemic will continue to influence our economic policies for years to come. The challenge, however, is to predict what this will look like and what the long-term ramifications will be.

At the start of the pandemic, I joined some of the brightest minds in economic and health policy at Princeton University to attempt exactly that: to predict how a global pandemic would affect our nation’s fiscal and monetary policy. It’s safe to say that in April 2020, when we first came together, we had no idea what our fight against COVID-19 would entail, nor would we have anticipated that we would participate in our 5and iteration of this discussion just a few weeks ago.

I recently sat down with Drs. Jessica Metcalf, Alan Blinder and Bill Dudley to, once again, try to predict the future of our economy, analyze the impact of Omicron and its future variants on our forecasts and examine how our initial fiscal and monetary policy in pandemic event has unfolded.

Current virus status:

To understand our current economic outlook, we started by laying out the current state of the virus itself. The latest variant, Omicron, resulted in a “gigantically” higher number of positive cases than what we saw during our last major spike. Fortunately, however, Omicron is causing the severity of symptoms to decrease and case rates are beginning to level off.


“Even if the infection was half as severe, if it’s twice as transmissible, it will cause the same strain on the healthcare system.”


Either way, Omicron should still worry us. This variant has placed critical pressure on our overburdened and understaffed healthcare system. Dr Metcalf, an associate professor of ecology, evolutionary biology and public affairs specializing in disease modeling at Princeton, explained that “even if the infection was half as severe, if it was twice as transmissible , it will cause the same strain on the healthcare system.” She added that while the death rate has been considerably lower than what we saw with the Delta wave, the total number of deaths is however already higher.

In analyzing how Omicron affects our economic outlook, we entrusted the discussion to renowned economists Alan Blinder, Gordon S. Rentschler Memorial Professor of Economics and Public Affairs and former Vice Chairman of the Board of Governors of the Federal Reserve, and Bill Dudley, former president of the Federal Reserve Bank of New York and now a senior research fellow at the Griswold Center for economic policy studies.

For the most part, Blinder and Dudley agreed that our economy has been through this latest peak of cases. When Blinder presented a graph of our country’s GDP, it was impossible to determine when the Omicron wave started, which has not been the case with past variants. Although Omicron has been a roadblock, our economy has continued to rebound in large part due to vaccines and recalls, as well as COVID-19 related fatigue.

Blinder said, “…many people have the ‘enough’ attitude, highlighting the combined impact of refusing to lock down with the resilience and adaptability of the private sector in changing business models.

Similarly, Dudley felt that while the new variant has proven to be less virulent, a more important factor is that for each degree of risk, our degree of disruption (economically as well as in terms of social distancing) is now much less.

Did the first tax expansion packages work?

At the start of the COVID-19 pandemic, fiscal expansion plans were huge, with the federal government providing $5 trillion in stimulus.

The first relief package came in March 2020 with the $2.25 trillion CARES Act. Then Congress passed the $0.9 Trillion Consolidated Appropriations Act in December 2020, right at the end of the Trump administration. Finally, President Biden signed the $1.9 trillion US bailout in March 2021.

For the most part, the initial stimulus, especially with the CARES Act, was bipartisan and welcomed. And while those relief programs were certainly flawed, they served as a lifeline for many families across the country and prevented a much worse economic situation. Overall, Blinder noted that in our moment of crisis, Congress acted quickly and broadly. He also observed that “all this real and projected government debt hasn’t pushed up long-term interest rates at all.”

Dudley was more critical of our early relief programs. He agreed that our initial fiscal response was strong; however, he felt there was also a significant downside due to the fact that many stimulus-related benefits accrued unevenly, with high-income households being disproportionately helped.

Blinder also pointed to the poor rollout, monitoring and targeting of the Paycheck Protection Plan, loan forgiveness and stimulus “checks” that many Americans across the country have received to help families for years. unprecedented difficult times. For low-income Americans who are not on IRS tax rolls, the checks may never have reached them.

Additionally, stimulus packages and changing consumer behavior – both due to the stimulus itself and pandemic fears – have led to supply chain shortages as our demand for goods has soared. sharply. This change was also a key component of our extremely high inflation rate.

Should we worry about inflation?

The most pressing problem – or non-problem – today is inflation. On this subject, Blinder and Dudley had slightly different views.

Blinder sits firmly in “Team Transitory”. Although inflation is too high – relying on the basic personal consumption expenditure report of 4.7% rather than the consumer price index value of 6.8% is more meaningful – he does not think inflation is here to stay.


“It’s a new phenomenon: we haven’t had high inflation for years, we’ve had high inflation for months.”


Why? In short, Blinder emphasizes the “inflationary price“He thinks we have to pay for our shift in consumption patterns from services to goods, where supply chains were unprepared to bear the burdens. He sees it already starting to return to normal as COVID fears ease. As evidence, he cited the fact that inflation has remained fairly concentrated in a subset of the goods and services that make up the index, energy prices are falling, fiscal and monetary stimulus are rightly and rapidly disappearing, and that bottlenecks and shortages have already begun to dissipate.

He reminded us that “this is a new phenomenon: we haven’t had high inflation for years, we’ve had high inflation for months”. Naturally, over the course of a year or two (rather than months), Blinder thinks inflation will return to near the Fed’s 2% target.

Dudley, on the other hand, is slightly more critical of the Fed and believes that their need to intervene has only been delayed rather than averted. He warns that “how financial conditions react to what the Fed is doing will ultimately determine how far the Federal Reserve needs to go during this economic cycle.” According to him, the current inflation projections are too optimistic and actual inflation will be higher and last longer than we currently expect.


“The Fed has been too quiet, too long.”


Dudley describes “four major mistakeshe believes the Fed has done: First, the Fed has operationalized its average inflation targeting regime in a way that means monetary policy will be extraordinarily loose even after the economy reaches full employment. Second, they were too worried about generating a “bond market crisis,” like the sell-off that happened in 2013, which slowed the reduction in asset purchases. Third, the inflationary shock turned out not to be entirely transitory, a risk he does not believe he anticipated. And fourth, the labor market has tightened much faster than expected by the Federal Reserve.

Dudley backs up his projections by pointing out that the labor market is already exceptionally tight – the unemployment rate is well below the estimated level of full employment and the labor force participation rate is slowly recovering due to pension and health concerns. . “If you look at the ratio of unfilled jobs to the number of unemployed people, that’s an all-time high,” Dudley observed. These patterns persist despite increased wage incentives.

Unemployment is at an unsustainable level and wage incentives are already higher than they would be with the Fed’s 2% inflation target. Dudley warns that any further increases would likely have a direct impact on our monetary policy.

In his view, inflation is here to stay because “the Fed has been too dovish, too long.” By being late, Dudley predicts that “the end result is…the Fed is going to have to move to tight monetary policy rather than neutral monetary policy.”

In sum, over the past two years, we have undergone enormous economic changes: a stock market boom, rising inflation, disruptive labor shortages and “the great quitting”, and trillions of dollars in measures stimulus packages infusing the economy.

Naturally, while we are still learning how to effectively and safely manage a world with COVID-19, it has been difficult to predict what lies ahead on the economic horizon.

All of these forces combined will ultimately determine our fiscal and monetary policy and what the Federal Reserve’s response will be. And while the future remains impossible to predict, these three brilliant academics provide solid rationale and direction for our fiscal, monetary, and health policy as we enter the new year.

You can listen to the full discussion at Episode 162 of A second opinion podcast.

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