Additional federal stimulus will likely add to already-simmering inflationary pressures and may lead to a sharper rise in interest rates, according to a new Fannie Mae report released this week.
Updated assumptions forecast a roughly $1.7 trillion stimulus package being passed by the middle of March, causing Fannie to update its full-year forecast for real GDP growth to 6.7% (up from 5.3%). If these predictions ring true, annual growth would clock in at its fastest rate in nearly 40 years. (Fannie Mae's forecast for full-year 2022 growth was revised down to 2.8% from 3.6%, which still leaves its end-of-year projection for 2022 GDP 0.8 percentage points higher than previously forecast.)
This new expected round of stimulus would bring the total COVID-related fiscal policy response to about $5 trillion, or 23% of pre-COVID annual GDP. Typically, stimulus is targeted at some amount smaller than the expected remaining size of recovery, but the total stimulus earmarked for COVID recovery represents "a deficit expansion only rivaled by the World War II period," according to Fannie Mae. The total is also multiple times larger than the "productive slack" in the US economy.
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