The Biden Stimulus, the Federal Reserve, and the Everything Bubble

Event Summary

On March 24, AEI’s Desmond Lachman hosted a panel discussion, moderated by Alex J. Pollock of the R Street Institute, on the risks to the global economy posed by continued expansionary fiscal and monetary policy.

Jeffrey Frankel of Harvard University stated that, while the economy will likely “overheat,” a flat Phillips curve may prevent inflation from rising to worrying levels. Nevertheless, Fabio M. Natalucci of the International Monetary Fund showed that global financial conditions are relaxed. While many countries were able to issue historic amounts of debt at low costs last year, US interest rates have recently begun to increase in response to inflation fears.

Should US yields continue to rise, market valuations dependent on low rates could change dramatically. William White of the C. D. Howe Institute outlined how easy monetary policy may have contributed to credit misallocations that weaken markets’ resiliency to future episodes of tightening.

Dr. Lachman emphasized the global implications of rising interest rates. Emerging markets may struggle to finance the deficits incurred during the coronavirus crisis. Rising US interest rates and a strengthening dollar only make debt defaults by developing countries more likely and increase financial stress globally.

— John Kearns

Event Description

In response to COVID-19, the US and other major countries are engaged in an unprecedented degree of budget and monetary policy stimulus. This economic support has allowed asset and credit markets to reach record highs, which many see as a sign that markets are overvalued and overextended. With the end of the pandemic now in sight and more stimulus forthcoming, higher inflation will likely add a degree of uncertainty to previously easy global financial conditions.

This event discusses the inflation and financial market risks of the current stance of US fiscal and monetary policy, focusing on the potential effects of President Joe Biden’s stimulus plan and reactionary central bank responses.

Event Materials

William White: “Suppose the ‘Everything’ Bubble Bursts: How Will the Global Economy Cope?”