Stimulus Checks: Could More in 2023 Ward Off a Recession?
Although inflation is falling, America’s bank accounts and budgets have taken a beating after nearly two years of rising prices. The last thing the country needs is a recession to kick it when it’s down — but that’s exactly what many experts are predicting for later this year or early 2024.
Stimulus 2023: Updates To Know Now
Find Out: How To Build Your Savings From Scratch
Three rounds of unprecedented stimulus payments helped the country survive its last crisis. Could another round of assistance prevent an economic downturn before it arrives?
Maybe, but a recession isn’t the only or even the most dangerous threat, and while many could certainly use the cash, the long-term risks don’t appear to be worth it.
Stimulus Would Thwart More Than a Year of Fed Strategy
The Federal Reserve can’t force banks to loan money at a certain rate. Instead, it manipulates the cost of borrowing by adjusting the discount rate that it charges banks for short-term loans. Starting on March 16, 2022, the Fed enacted the first of what would become 10 consecutive increases to its short-term rate, which spurred banks to raise the cost of loans to a 16-year high.
It’s a strategy that then-Fed Chairman Paul Volcker pioneered and successfully implemented during the inflation crisis of the late 1970s and early ’80s — pull money out of the economy by making it more expensive to borrow so demand falls and runaway inflation cools, even if it triggers a recession.
No One Wants a Recession, but Runaway Inflation Is Worse
Congress can authorize stimulus payments whether the Fed likes it or not. But it’s hard to imagine lawmakers injecting hundreds of billions of dollars into the economy when the Federal Reserve has dedicated more than a year to a painful strategy designed to do just the opposite — especially now that it’s working and inflation is finally subsiding.
“Stimulus checks seek to pump more money into the economy and promote consumer spending,” said Jake Hill, CEO of DebtHammer. “Unfortunately, though, this type of aid can actually help fuel inflation.”
The Volcker philosophy accepts the potential for a brief economic downturn as an unpleasant, but still preferable tradeoff.
“The negative consequences of a resurgence in inflation are significantly more severe than those of a mild recession,” said June Jia, a quantitative researcher at GF Securities and owner of Canny Trading. “Consequently, implementing another round of economic stimulus measures at this time could be counterproductive.”
See: 7 States Considering More Stimulus Checks in 2023
Stimulus Would Be a Solution in Search of a Problem
When Congress passed the CARES Act in March 2020, the economy was hemorrhaging tens of millions of jobs, the stock market crashed and the country was in the grips of a terrifying public health emergency. That’s precisely the kind of rare and urgent emergency that justifies expensive widespread stimulus spending.
“Stimulus checks or programs have been used at many points over the years to fill gaps or restart consumer spending,” said Jeff Miller, vice president of the Northwest region for Churchill Mortgage. “From the housing industry perspective, after the credit crisis in 2008-09, the first-time home buyer tax credit of $8,000 was used to revive a housing market that was on life support, which was one factor that kickstarted a housing surge that went on for 10-plus years.”
But today, the economy has shown remarkable resilience. The GDP is growing, the stock market is up on the year and employers are adding more jobs than expected.
Stimulus spending is an emergency measure that doesn’t currently have an emergency.
“At the moment, introducing a new round of economic stimulus measures is not a favorable option,” Jia said. “The current economic situation in the United States appears relatively stable.”
A Soft Landing Is Still Possible
Volcker’s relentless and successful war on inflation triggered a recession in 1981-82, but that outcome isn’t guaranteed to repeat itself today. The Fed is aiming for a so-called soft landing, which strikes the perfect balance between tightening the money supply just enough to tame inflation without triggering a recession.
“Despite the media narrative, we have not established that there is going to be a recession in 2023,” said Steve Vanderwey, Miller’s colleague at Churchill Mortgage.
Even if there is a recession, Fed economists and many industry leaders and analysts predict it will be short and shallow.
“As of now, predictions about a 2023 recession suggest it will have a light impact,” Hill said.
None of that screams out the need for widespread stimulus — and although most people would gladly accept the check, that might be a good thing.
We’ll Never Know Because It’s Not Going To Happen
As previously stated, new federal stimulus payments would require an act of Congress, which is currently divided along razor-thin margins in an intensely bitter political climate. With no real emergency to rally around and the 2024 elections in sight, there is no plausible path toward the necessary legislative consensus.
In short, aside from small potatoes at the state level, there will be no new stimulus in 2023 — and that’s fine by many experts.
“I believe that stimulus is like medication,” Miller said. “It can help when you know what your sickness is and the prescription is directed at the treatment. But when you are unsure what the actual issue is, it’s hard to know if the medication is working. You think you feel better and maybe a couple of days out of the week you notice a little difference, but you’re not 100% sure, so you just keep taking it because you think it’s having an effect. Then, when you aren’t feeling well again, you add more medication. I think we are overmedicated when it comes to the use of stimulus packages and we need to get healthy. That takes work, and unfortunately, it can hurt.”
More From GOBankingRates
This article originally appeared on GOBankingRates.com: Stimulus Checks: Could More in 2023 Ward Off a Recession?
