COVID-19 spending, which was essential for averting a global recession, has left new economic risks, according to research organizations including the International Monetary Fund and the Brookings Institution.
While providing critical relief for Americans at the pandemic’s outset, most economists agree, the government’s $5 trillion financial assistance package may have left after-effects that will be difficult to eradicate.
Global inflation, risks of interest rate and currency shocks in developing countries, rising U.S. debt, and mistargeted spending are among the concerns.
Higher inflation, which has proven stubborn, may indicate a new era of price and market volatility, IMF First Deputy Managing Director Gita Gopinath and Bank for International Settlements General Manager Agustin Carstens said at the Federal Reserve’s Jackson Hole conference in August, reported Reuters.
In September, their sentiment was supported by the Brookings Institution, which warned of the pandemic aid’s lingering downside. Among the research organization’s worries are an increased unemployment rate that could occur while tackling inflation and the surging dollar’s triggering of global shock following the Fed’s increased interest rates.
"Determined disinflation by the Fed and continued appreciation of the dollar could lead to more intense debt troubles for a range of (developing countries)," Maurice Obstfeld, a former IMF chief economist who is now a professor at the University of California, Berkeley, and Princeton University's Haonan Zhou wrote in a research paper. "Indeed, danger signals are flashing already. On the other hand, if the Fed fails to get a handle on U.S. inflation, that would be disruptive in the longer term."
Brookings research contends that people used the initial relief checks for durable goods but in general failed to spend the third stimulus payments, which acted as a form of insurance for many families.
Also, the findings suggested that "the small, short-term spending response and its pattern suggest that the (economic impact payments) went to many people who did not need the additional funds," the effects of which we may be dealing with now. "From a demand-management perspective, the unspent EIPs have contributed to strong household balance sheets over the past year, a period of strong demand, and rising inflation."
Biden administration officials say they believe the Fed can control prices without tipping the economy into recession.
"We believe that there is a path to being able to both bring down inflation but continue to see the positive momentum we've seen in the economy," Deputy U.S. Treasury Secretary Wally Adeyemo told Yahoo! News.