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MNI INTERVIEW: Modest CPI Lift From Biden Relief: Chicago Fed

MNI (Ottawa)

Macro Research Director Fisher argues USD1.9 trillion plan means modest and transitory inflation boost under most scenarios.

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President Joe Biden's recent USD1.9 trillion fiscal package will most likely deliver a modest and temporary boost to inflation, Chicago Federal Reserve Director of Macroeconomic Research Jonas Fisher told MNI.

"Modest and transitory is how I would describe the main message," he said in an interview discussing a paper he co-authored with Duke University associate professor Francesco Bianchi and Chicago Fed senior economist Leonardo Melosi.

The paper used four Phillips Curve models of the U.S. economy to map out inflation pressures. Three of the models using data since 1990 showed the inflation pressure is "generally modest and short-lived," according to the paper. The fourth model with data from 1960-1990 showed larger and more persistent effects, in line with inflation trends of that era.

"While these older dynamics seem unlikely to reemerge, they are still a risk to the outlook," the authors wrote in the paper.


Bond yields have climbed from historically low levels this year on signs that near-zero Fed rates and Biden's "American Rescue Plan" will boost economic growth and inflation. Biden has also pitched another USD2 trillion package for longer-term infrastructure. People including Larry Summers have criticized the stimulus for creating needless inflation risks.

The paper wasn't designed to estimate the cumulative inflationary effects of policy stimulus along with the lift coming from comparisons to last year's slump in gasoline pries, Fisher said in the interview.

Some of the models using more recent data show scenarios of inflation rising around half a percentage point, an effect that almost disappears by the end of 2023. The model using the older data shows fiscal stimulus quickening inflation by about 1 percentage point around the middle of next year and only a small moderation through the end of 2023.

Another part of the paper suggests that if people believe the United States has abandoned its commitment to stabilizing the government's finances, it could become another inflation risk. "According to the model, the high debt represents a macroeconomic vulnerability, in that if there is a sharp change in beliefs about debt stabilization, it could have a substantial impact on inflation," the paper said.

"To the extent that we believe models grounded in more recent data, then I think we have some confidence that the effects will be modest and transitory," Fisher said about the inflationary effect of the fiscal package. "The transitory nature is due to the transitory boost to spending that we get from the American Rescue Plan."