Today’s blowout job numbers are wonderful news for the U.S. economy. They suggest that, even before President Biden’s massive budget stimulus took effect, the U.S. economy was roaring back to life and American workers were returning to work in droves.
The fly in the ointment, however, is that these strong job numbers give further grounds for fearing that today’s highly expansive budget and monetary policies will lead to economic overheating and trouble later this year.
Indeed, they have to raise a basic question. With the U.S. economy apparently firing on all cylinders before the Biden budget stimulus was in place, did it really need a further $1.9 trillion budget boost?
This question would seem to be particularly relevant at a time that the Federal Reserve is continuing to buy each month $120 billion in U.S. Treasury bonds and mortgage-backed securities.
Far outpacing market expectations, today’s employment numbers showed that the U.S. economy added more than 900,000 new jobs in March. This followed an upwardly revised increase of more than 420,000 new jobs in February and allowed the overall unemployment rate to tick down to 6 percent. That is the lowest unemployment level since the pandemic’s onset last year.
With large new budget stimulus checks now being mailed out and with the pandemic restrictions being progressively rolled back, one would be surprised if over the next few months employment does not continue to increase at the same very rapid pace as it is now increasing. One would also be surprised if, over the next few quarters, the U.S. economy did not grow by close to the 10 percent rate that many market analysts are now expecting.
All of this would be unambiguously good news if both our budget and monetary policies were now not set on as an expansive path as they now are since that might lead to economic overheating. With the Biden Administration now proposing a massive infrastructure program, there is now also the real risk that budget policy could become even more expansionary than it is now. Meanwhile, Federal Reserve Chairman Jerome Powell has made it abundantly clear that the Fed has no intention of dialing back its ultra-easy monetary policy until it sees clear evidence that inflation is actually picking up.
The danger of an overheated economy later this year is not so much the risk that it will lead to higher inflation on a sustained basis. Rather, it is that it might be a further invitation to the bond market vigilantes, who have already driven up the U.S. 10-year Treasury bond yield up from less than 1 percent at the start of the year to around 1 ¾ percent at present. This would be particularly the case should the markets judge that the Biden budget stimulus is excessive and that Jerome Powell was behind the inflation curve.
With the world in the midst of a global everything equity, housing, and credit market bubble, it would seem to be a particularly bad time to be risking the wrath of the bond market vigilantes. By driving up market interest rates, the vigilantes could very well burst today’s everything bubble which is premised on interest rates staying very low indefinitely. If the experience with the bursting of the 2008 US housing market bubble is anything by which to go, the bursting of today’s everything bubble could lead to a very hard landing for the US and global economies.
Before getting carried away by the current strength in the US economic recovery, President Biden might want to heed Aristotle’s warning that one can have too much of a good thing. Maybe then he will have second thoughts about his overly expansive budget stimulus. However, I would not recommend holding one’s breath for that to happen.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.