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The risk of Pres. Biden overstimulating the economy

Yahoo Finance’s Rick Newman joins the Yahoo Finance Live panel to discuss the risk of Pres. Biden overstimulating the economy.

Video Transcript

- Well, as Congress debates the $1.9 trillion plan, some economists and lawmakers are raising concerns the size of the stimulus threatens to overheat the economy. Let's bring in Rick Newman for that. And Rick, you've got a column out today on this. One of those leading voices of course, former treasury secretary Larry Summers, who put out an op-ed last week that prompted current treasury secretary Janet Yellen to take to the airwaves over the weekend, saying essentially that look, we've. Got the tools in place to keep inflation in check. But you say that may not necessarily be the case.

RICK NEWMAN: Right. It's not just Republicans looking for ways to ding the Democrats for the next huge stimulus plan. There are some Democrats who don't necessarily think this is the wrong thing to do, but they're just saying, look, we do need to be aware of inflation. And you've got a lot of people saying inflation, like what are you talking about? We haven't had inflation since like, 1977.

But what actually is likely to happen is, so if Biden gets to this bill, it's going to be a total of about $6 trillion in federal stimulus spending during a 12-month period. The last recession, we only had $780 billion. So we're talking six to seven times the amount of federal relief and stimulus spending as the last time around. And that probably is going to lead to a kind of a hot economy by later this year. Probably a lot of spending on things, if the coronavirus vaccines start to work and consumers start to be free to leave home and travel a little bit and go out and do stuff. And believe it or not, we actually are seeing relatively high inflation in some consumer products already, such as appliances, and other parts of the economy.

So I think what we are likely to see is pockets of inflation. We could see the CPI, for example, hit 3% or 4% in a given month, or two or three, which is above the Fed's target. So the question is, will that bother the Fed if it happens? Or are they just going to say no we're fine, we're going to ride it out, we don't think we need to reverse our easing policy.

So, I think this is going to get a little bit interesting later this year. Most economists do not agree with Larry Summers, that we're going to have inflation that as is at a troubling level, however.

- Yeah Rick, obviously when we look at it, some forecasters have been moving forward their targets for not just the Fed raising rates, but also tapering their purchases as well. Obviously the market is again, very different from the underlying economy. And we've heard that stress from Fed Chair Jerome Powell many times talking about trying to create a bridge for those at the bottom rung of the wealth ladder here.

When you look at maybe some of the moves here from Democrats though, I'd be curious to get your take on where they're looking to negotiate. Because we talk so much about unity, what do you make of maybe the small things that Democrats might be looking to do in terms of maybe lowering the threshold in terms of where we see stimulus checks phased out? Is that enough to maybe make good on this idea of unity? I know the Democrats are kind of stuck in a tough spot.

RICK NEWMAN: There's no unity. The Democrats really only need to negotiate among themselves, because they do have that one-vote majority in the Senate. So what Democrats need to do is completely agree among themselves on what they're going to vote on and then vote on it. It seems to me they thought about lowering the income thresholds for people who are going to get that additional $1,400 check, decided against it. So it's probably going to be what we've been familiar with, phase out at $75,000 for an individual or $150,000 for a couple.

The one thing that I think is not going to be in the relief bill is an increase in the minimum wage, mainly for technical reasons. Because it probably will not go by the so-called reconciliation rules. We can talk about that another time. And maybe Democrats are not going to pass a $1.9 trillion bill. Look for something, maybe $1.5 trillion. Again, that remains a ton of stimulus when you add it all up, compared with what we did during the last recession.

- Yeah, quite a big boost and we'll see what the final number comes out to be. But clearly Democrats, as you said, leaning into going full steam ahead with their own plans here. Rick Newman, appreciate you joining us on that front.