Effect of Government Spending

May 12, 2021

It is an exciting time as it has finally begun to feel like COVID-19 is in our rearview mirror. More and more individuals continue to get vaccinated each day and eligibility for vaccinations has now reached children aged 12 to 15. The stock market made new record highs last week and it seems as if individuals are eager to get out and spend their most recent round of stimulus checks. Many businesses have also begun to consider allowing workers to return to the office on a more permanent basis, some requiring vaccines, and others not. While many aspects of life seem to be trending in a positive direction, there is one looming question as we get closer to the end of the pandemic: How will the massive U.S. government spending, affect the economy post-pandemic? President Biden has recently introduced his infrastructure plan which many have clamored to include a fourth round of stimulus checks. Not to mention, there has been the ongoing topic of eliminating a portion of student debt for millions of current and former students. While this money has helped many families in need, what will be the long-term effects of this spending? One potential answer is increased inflation. The Federal Reserve has repeatedly stated that they will not be raising interest rates until at least the end of 2022. However, the number one goal of the Federal Reserve has been to keep inflation around 2% annually. The main tools they use to achieve this are adjusting the interest rate and increasing or decreasing the money supply. The money supply in circulation has increased in the past year and without an increase in the interest rate to offset this change, a higher inflationary period may ensue. Time will tell if this occurs or not, but if we learned anything from the late 1970’s, it would be that controlling inflation is extremely important. To learn more about how inflation may affect you and your financial goals, contact us today!

Carol Dixon, CFP® & Kevin DeRosa, CRPC®