Stimulus Update: After a Stimulus Autopsy, Here’s What the Fed Found

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Sometimes, you have to weigh the good against the not so good. 

Listening to partisan bickering over whether stimulus funds led to inflation is like hearing two cousins at a funeral, arguing over which one Grandpa Jack wanted to leave his fishing boat to. After a funeral, arguments can be settled when the will is read. And after a global pandemic, it evidently takes an unemotional report from the Federal Reserve to straighten things out.

After conducting a stimulus autopsy of its own, here’s what the Federal Reserve found,

The connection between stimulus checks and inflation

A new study by the St. Louis Federal Reserve found that government stimulus payments were at fault for some U.S. inflation. To be precise, the Fed can trace 2.6% of the 7.9% 12-month inflation rate in February 2022 to stimulus payments.

Here’s what happened

More than half of Americans who received stimulus checks during the pandemic reported using theirs to pay for basic necessities, including rent and food. Those with higher incomes tended to stash their funds away in a savings account. Suddenly, people had access to more disposable income.

However, those folks were still worried about COVID-19 transmission and were under travel restrictions. That meant that instead of paying for services like eating in a restaurant or having a manicure, they spent their money buying goods.

Now, here’s where things got tricky. All that spending was good for the economy. After all, there were legitimate concerns that the economy would fall into a black hole it couldn’t climb out of. However, manufacturing could not keep pace with the demands of the buying public.

The value of any product comes down to demand and supply. The demand was high, and the supply was woefully low. And so, prices crept up and up.

Were stimulus checks worth it?

In the long run? Probably. Here’s why

U.S. economy

As mentioned, there were grave concerns about the havoc COVID-19 could wreak on both the U.S. and the global economy. In order to get the economy back on track, people were going to need to crack their checking accounts open and do some serious spending.

The St. Louis Federal Reserve authors wrote that we must recognize the positive role government support played during this unprecedented crisis. Stimulus spending supported a strong economic rebound, with both GDP and employment recovering at a remarkable pace. While stimulus also added to inflationary concerns, it likely prevented a worse economic outcome for the U.S.

American citizens

The early days of the pandemic were dismal. Low-income Americans, who had already been struggling financially, now had bigger problems to deal with. Many white-collar Americans were able to pull out their laptops and work from home in 2020 as the death toll ticked upward, but others were not that fortunate. Businesses closed, and unemployment surged. The number of people living below the poverty line climbed.

The series of three stimulus checks made the difference. The Fed refers to those payments as “an essential lifeline for low- and moderate-income Americans.” According to the U.S. Census Bureau, stimulus checks may have helped lift nearly 12 million people out of poverty in 2020 alone.

As various factions argued over the necessity of aid to the American people, the Census Bureau also found that problems like malnutrition, mental health issues, and financial instability improved, thanks to stimulus payments.

Studies from both the St. Louis and San Francisco Federal Reserve offices concluded that the social benefits of stimulus payments may outweigh the negatives of inflation.

Of course, like cousins at a funeral, arguing over Grandpa’s fishing boat, we probably haven’t heard the end of this debate.

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