The Fed Fights Inflation At The Cost Of Restricted Wage Growth And Jobs Losses: States Move In With Stimulus Checks To Provide Immediate Relief

Stimulus check
Stimulus Check

American domestic finances are careening towards a rougher patch than they have been facing this past few months. Consumer costs are inching northwards at the quickest rate since 1981. Rapid inflation is affecting every sector as varied as home rents and airfares. And pain is not going to subside soon, especially in the absence of stimulus checks from the federal administration.

The Federal Reserve policy is the main tool the US administration uses to fight the increase in prices. The Federal Reserve is trying to rein in the runaway inflation rate by raising the rate of interest. Butt that could set off a cooling process in the economy.

A higher rate of interest increases mortgage costs and company borrowings. This will pull down expected market growth and cut back on hiring. With the weakening of the job sector, there is a stagnation in the growth of paychecks which proves a damper on business growth. This whittles down purchases and gives the strained supply chain an opportunity to catch up with demand.

Al Round Erosion In Income And Home Balance Sheets

Many families, especially in the low-income group, are facing the challenge that wages might see a slowdown way before there is a drop in the prices of goods. The administration has predicted that the rate of unemployment would start to sneak up before the year-end, but inflation would stay higher at around 5.2%.

This could lead to an erosion of consumer buying power in a market where the rise in wages has failed to catch up with the rise in prices. The increasing rates have also created a negative sentiment in the markets and have severely hit stock prices, causing an erosion in the value of the savings of many families who have invested in the stock. Higher costs of mortgages are also slowing the housing market and could lead to a drop in the values of homes. This will further cause a drop in wealth as real estate comprises a substantial part of their net worth.

And as domestic balance sheets and incomes take a hit, many citizens are left wondering if this is the route to rein in inflation.

Catching Up In The Absence Of Stimulus Checks

A rise in demand for more services and goods has pushed up prices as companies are not able to produce enough to catch up with demands. For instance, there was a sudden spurt in demand for cars, but the establishments could not manufacture enough to feed the surge as there was a shortage of parts. And with a limited supply facing an excessive demand for pickups and sedans, the prices of cars skyrocketed.

The economy stays stable as long as the demand and supply side stays balanced. But the high demands brought in painful results. And the Fed action does not propose to be a solution to it.

The Federal Reserve pushed up interest rates to an astonishing double-digit back in 1981 to contain the high inflation then. The effect was disastrous as it set off a painful period of recession that pushed unemployment to as high as 11%. Thankfully the unemployment rate is at a historic low of 3.6%, a lot due to the money that the federal administration pumped in through the successive stimulus checks and its efforts to save businesses.

Ramping Up Production Is The Need Of The Hour

The grim consequences of the eighties have prompted many economists to demand a more all-inclusive solution to the price issue. They contend that it is due more to a disruption in production and supply and strong demand due to excessive liquid cash in the hand of citizens.

The administration can chip in by helping American companies ramp up manufacturing in vital sectors of the economy and offer relief to the supply segment.

The long route of reforms can have its drawbacks as a bigger bill for groceries and rent will force people to demand more wages and prompt employers to increase prices. The economy thus gets stuck in a never-ending cycle.

Under these circumstances, the prompt action taken by the Fed to increase rates and rein in inflation seems a painful though quicker tool. The Fed went for the biggest increment in interest rates since 1994 and also indicated that it would further increase rates this year. The increase could be greater in this year than it happened over the whole period of economic growth between 2009 and 2020.

The approach taken by the Federal Reserve will be painful, and the stock market has been the biggest casualty. But the administration contends that allowing the inflation to grow unhindered will make matters worse and would in the long term fuel uncertainty. And the biggest losers would be the low and moderate-income groups who have limited income and no room to wiggle in their already stressed budgets.

States Move In During Such Uncertain Times With Stimulus Checks To Help Ease Inflationary Pains

Even as Maine and New Mexico continue to send out stimulus checks to the residents, California is among the latest of around a dozen states who have declared stimulus checks for their residents.

Around 23M residents of California are set to get inflation relief checks following an agreement between Governor Gavin Newsom and the state legislature.

Families could get up to $1,050 in the case of joint filers. And most beneficiaries will spend it on fuel and food, the two leading pain points for most families at this stage.

The stimulus checks will go out to families who have filed their income tax returns for 2020. Those with an income of $75,000 and less will get a stimulus check of $350. For income between $75,000 and $125,000, the stimulus check will be worth $250. Those who earn up to $250,000 a year will receive a $200 stimulus check. Thus, a family of three could expect a $1,050 stimulus check if their earnings are below $75,000.

The budget has included extra grant funds for people on the SSI program list of the state which should benefit people who are 65 years and older, the blind, and the disabled.

The California governor has also announced an additional package other than the stimulus check.  This package will help to suspend the sales tax levied by the state on diesel and also send additional funds to help people with their utility bills and rent.

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