• Many households have resources to spend. The government’s rescue packages, by providing cash payments and added unemployment benefits, have done a lot to mitigate damage to people’s finances. As a result, Americans as a whole aren’t facing the kind of mortgage-debt and bad-credit problems that plagued them in the aftermath of the 2008 financial crisis. Their capacity to spend is evident in the sharp rise in the personal saving rate, which climbed to 13.4% of disposable income last quarter, compared with 7.5% in 2019. Moreover, households that own stocks and homes have seen their wealth grow quickly.
• Companies have money. Financial conditions are extraordinarily accommodative. The U.S. stock market is reaching new heights and bond yields remain usually low, giving enterprises ample opportunity to raise funds for expansion.
• People are starting to expect more inflation. Prices in the market for Treasury securities suggest that investors currently expect the Fed’s preferred inflation measure to average about 2% over the next 10 years. That’s up about half a percentage point from November. This matters, because inflation expectations tend to be an important determinant of actual inflation outcomes.
All this suggests that the Fed, despite its desire to be accommodative and boost employment, might have to pull back on stimulus sooner and with greater force than anticipated to keep inflation in check. Such a move would be a significant surprise, given that in the Fed’s most recent Summary of Economic Projections, the median projection foresees no rate hikes through 2023. This, in turn, would further increase the chances of a volatile market reaction, along the lines of the taper tantrum that the U.S. experienced in 2013.
Bill Dudley is a senior research scholar at Princeton University’s Center for Economic Policy Studies. He served as president of the Federal Reserve Bank of New York from 2009 to 2018, and as vice chairman of the Federal Open Market Committee. He was previously chief U.S. economist at Goldman Sachs.