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Reviving the child tax credit is a ‘good idea’ amid inflation, energy price shocks: Economist

RSM Chief Economist Joe Brusuelas joins Yahoo Finance Live to discuss the U.S. economic pressures on growth and inflation that sanctions on Russia could impose, the child tax credit, global economies, and how central banks may handle energy markets.

Video Transcript

BRAD SMITH: Joining us now, we've got Joe Brusuelas, who is the RSM chief economist. Joe, good to speak with you here this afternoon. Help us break this down even further. Do the sanctions go far enough at this point, as Russia has already begun its invasion?

JOE BRUSUELAS: So in my estimation, the sanctions are proportionate to the limited incursion into Eastern Ukraine. I would think, given what they're saying and given what our allies over in the UK are signaling, that if the Russians do move past the [INAUDIBLE] river, we had a full-fledged invasion, then we'll get the more tougher, more robust, probably more biting sanctions. But right now, one of the reasons why we're seeing the market respond the way it is today is restraint on the part of the Allies, at least for today.

BRAD SMITH: And so with that in mind, there is this annexed thought of what other economies this could have an impact on. What material impact do you anticipate the Russia-Ukraine conflict to have on even the US economic recovery momentum that we've been trying to continue to see move forward?

JOE BRUSUELAS: OK, if the status quo holds, all we're going to see is a very limited impact on growth and inflation. Should we see a full-fledged inflation, followed by much more tougher sanctions, then we're going to be in a very different world. So a couple of weeks ago, we modeled the two, three, and five standard deviation shock to the US economy. Our baseline is now expecting a 20% increase in the price of oil. Now that's from two weeks ago. We're about 7% of the way there. If that occurs, you'll see 1% shaved off growth this year, US domestic product, and you'll see an additional 2.8% or thereabouts increase in inflation. That occurs at one point, we will pass 10% on a year over year basis.

Now at that point, given what's happened, given the possible exogenous shock from the geopolitical sector, it would make sense the administration begin to move forward to provide some relief to middle income, working class households and the poor because food and fuel will become quite dear. And it would be, in my estimation, a good idea to revive the child tax credit because I think that is a proven way to provide direct relief, targeted households that need them, those with children who then, in turn, spend it on food, fuel, clothing, and shelter.

BRAD SMITH: OK, and so you started to get into some of the measures that the White House could implement. And Biden, of course, earlier saying that he was looking to mitigate energy price impacts to US consumers. But break down the child tax credit for us a little bit more and why that would be so significant, especially at this time.

JOE BRUSUELAS: OK, so it's a tried and-- it's a tested and ready program. We implemented it during the pandemic. And essentially, what it did was it targeted households with children. The plan was so broadly written that it actually reached 95% of all households with children, monthly checks for six months, and then a tax credit for the other six months. And we were able to track the use of that cash via the Census Bureau's special pulse surveys. So when we took a look at that, what we saw was this was a program that was actually utilized to buy necessities, not necessarily luxuries. And this is what you want to see during times of stress.

And let's be honest. The rate at which inflation is increasing, we're likely to move close to or above 8% when we look at the next monthly reading in the CPI. Stress was building among American households, especially those in the three lower quintile of income groups. If we do see a further energy shock due to the Russian invasion-- or a total invasion of the Ukraine, you can expect more of the same.

BRAD SMITH: And so, Joe, when we think about the US and the international investments that have been made into the US, there's also the significance in the amount of investments that have come in even from areas like in Russia. And because it's hard to trace back to know exactly where those investments are coming in from, how significant is this Ukraine and Russia conflict in America and some of the investments that they have already received, that we have already received, whether they be for things such as infrastructure or for other measures to ensure that there is the capital that's ready to deploy for some of the economic buildup as well?

JOE BRUSUELAS: All right, so in my estimation, we're really talking about a small quantity of money. The Russians like to recycle Petrodollars in London, in places like Miami. Typically, it moves through the economy via the purchase of homes and investments in businesses. Federal government can target this. These are large movements of cash. And they're able to engage in what they call micro-targeting of economic sanctions. This is not going to disrupt the financial system. It's not even going to disrupt your local neighborhood, right?

The main issue at hand is, will there be another supply shock to the American economy, to the global economy, to the EU and German economy in particular via, again, the energy channel, via oil prices and rising natural gas? That's the much bigger issue at hand than whether a number-- a very small number of very wealthy people find out that they can't tap their credit cards to go out to very expensive restaurants in London or Miami.

BRAD SMITH: Certainly, and then just lastly, while we've got you, Joe, the impact, of course, that this has as of right now, at the same time where we're going to be waiting to see what the tenor and the size of the Fed's rate hike will look like, you know, how much more difficult does this make the Fed's decision? We heard from one of the Fed presidents, Michelle Bowman, over the weekend, who, in this American Bankers Association commentary, did not want to mention international relations or anything that's taking place overseas.

JOE BRUSUELAS: OK, so the Federal Reserve and their global central banking brethren are in a very difficult position now. They're going to have to hike into what could be an energy shock and a slowing global economy. My sense is that the Federal Reserve ought to hike by 25 basis points at the March meeting, but they ought to use the opportunity of both the communiqué and the summary of economic projections to note the risks around the evolving global environment and just frankly admit that, hey, guys, we hiked by 25 basis points.

We're incredibly data dependent, and we don't know what we're going to do next. And that will be, in part, linked to the evolution of the crisis in Eastern Europe. And I think that's a good place to stop because they just simply do not know. My sense is that the seven hikes priced in, 125 basis points, might be a little much. I'm comfortable with four or five. But we'll have to see how this year evolves. The central bank, boy, I wouldn't want to be one of them right now. This is going to be the worst time, really, in our common career cycles.