(Yahoo!Finance) - The Federal Reserve’s schedule for raising rates could be impacted by the Build Back Better bill, if it passes, Tomas J. Philipson, economist at University of Chicago and former White House Council of Economic Advisors chair, told Yahoo Finance Live yesterday.
“But what I think is interesting is, [the Fed] has been accommodating to fiscal policy throughout the coronavirus,” Philipson said. “But I think if the Build Back Better [bill]... passes, we're going to probably see the Fed kind of counteracting fiscal policy with more inflation control measures, which will be a change of direction from the past.”
The Build Back Better Plan is the name given to President Biden’s proposed legislative spending plan. The plan includes funding for social services programs, coronavirus relief, and infrastructure, among other initiatives. A $1.75 trillion version of the plan passed the House of Representatives by a slim margin of 220–213. This bill includes over $790 billion for family-related payments and services, $440 billion for environmental and climate change provisions, and over $350 billion allocated to health care.
“I think it's important here to keep in mind that this inflation is contracting obviously the Build Back Better agenda,” Philpson said. “We've calculated essentially that if you have an excess of inflation above wage growth of 2% a year, the nominal terms of Build Back Better it's going to be essentially inflated away. So if you look at the child care credit, et cetera, you know, per family per capita gains in income are in nominal terms going to be inflated away by a 2% excess inflation above wage growth.”
In the Senate, the bill has run into problems with some of the Democrats' more moderate members. In a split Senate, with 50 Republican members and 50 senators who caucus with Democrats (48 Democrats and two Independents), the plan would need full Democrat support to force vice president Kamala Harris to be the tie-breaker and ensure the passage of the bill.
The plan currently has yet to generate popular support, for several reasons. The Senate version of the bill continues to undergo modifications.
Meanwhile, the Federal Reserve is expected to raise interest rates in 2022, possibly multiple times. JPMorgan estimated last month that the Fed will raise rates by 0.25% beginning in Q3 2022. Other banks have different estimates regarding the timeframe, but most agree that the Fed will take action next year.
Inflation has rapidly increased throughout the year, reaching levels unseen in four decades in November. High interest rates could help bring prices down and reduce inflationary pressure on the economy.
Spending increases brought upon by the Build Back Better bill could interfere with the Fed’s hawkish monetary policy, if they choose to pursue higher rates.
Philipson noted that fiscal and monetary policy would have to work together to find a solution which cools inflation yet also appropriately responds to the new Omicron coronavirus variant. “I think it's not so much of a Fed [issue] as it is a regulatory and fiscal policy issue,” he said.
Ihsaan Fanusie is a writer at Yahoo Finance.
