White House Slashes Its Deficit Projection

White House Slashes Its Deficit Projection

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Plus, scaling back the Fed's stimulus
Friday, August 27, 2021

Welcome to the weekend! Here's what happening on the fiscal front as we head into the final days of August.

Powell Says Fed May Soon Scale Back Its Stimulus

Federal Reserve Chairman Jerome Powell indicated Friday that he expects the central bank to start pulling back its emergency support for the economy this year as the recovery from the Covid-19 crisis continues.

In prepared remarks released before a virtual version of the annual gathering of bankers and academics at Jackson Hole, Wyoming, Powell said the economic recovery from the pandemic has been remarkably robust, with employment gains coming faster than expected.

“The outlook for the labor market has brightened considerably in recent months,” he said. “The pace of total hiring is faster than at any time in the recorded data before the pandemic. The levels of job openings and quits are at record highs, and employers report that they cannot fill jobs fast enough to meet returning demand.”

At the same time, however, with 6 million people still out of work compared to pre-pandemic levels, the recovery is far from complete, Powell said, so it is too early to tighten monetary policy by raising interest rates. “Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful,” he warned.

Since the crisis began, the Fed has been spending as much as $120 billion per month to purchase U.S. government debt and mortgage-backed securities. Fed officials will look for signs of continued improvement in the labor market before “tapering” those purchases, Powell added, paying particular attention to any damage caused by the rapid spread of the delta variant.

Inflation still seen as transitory: Powell stuck with his previously stated view that the increase in prices seen in some sectors of the economy in recent months is temporary.

“The rapid reopening of the economy has brought a sharp run-up in inflation,” he said. “Businesses and consumers widely report upward pressure on prices and wages. Inflation at these levels is, of course, a cause for concern. But that concern is tempered by a number of factors that suggest that these elevated readings are likely to prove temporary.”

Powell cited several factors he says bolder his view that inflation is transitory, including an easing of pricing pressure on a handful of key commodities such as used cars; the lack of evidence for the formation of a “wage-price spiral” throughout the economy; and the continued presence of long-term deflationary trends that have pushed prices lower over the last few decades.

“To sum up, the baseline outlook is for continued progress toward maximum employment, with inflation returning to levels consistent with our goal of inflation averaging 2 percent over time,” Powell said.

Still, not all economists are so sure that inflation will ease so rapidly or completely.

CNBC’s Jeff Cox reports that some officials at the Fed are more worried than their chairman about the severity of the current burst of inflation. Ahead of Powell’s appearance at the Jackson Hole conference, Philadelphia Fed President Patrick Harker told Cox that, “There’s also some evidence that they may not be so transitory, and that’s a risk I’m worried about.”

White House Doubles Its Inflation Forecast, Slashes Deficit Estimate

The Office of Management and Budget on Friday revised its inflation outlook for the fourth quarter upward to 4.8%, more than twice the 2% level forecast in May.

That increase brings the White House in line with the Federal Reserve forecast. Both see inflationary pressure easing rapidly next year, dropping to 2.5% by the fourth quarter of 2022 and 2.3% by 2023.

As part of its mid-session budget review, the administration also boosted its estimate of annual economic growth to 7.2% this year, up from 5% projected in May. And it estimated that the deficit for fiscal year 2021 will be $3.1 trillion, a reduction of $555 billion from the earlier estimate of nearly $3.7 trillion. It noted that the actual year-end deficit is likely to be even lower given monthly trends. Projections for the deficit as a share of the economy also fell, dropping to an estimated 13.9%, down from a previous forecast of 16.7%.

The White House still projects deficits topping $1 trillion a year for the next decade, but it now says that the cumulative total of those deficits will be $684 billion lower than it previously projected.

Quote of the Day

“You’re asking Democrats only to vote for a really big tax increase. And that’s really hard to do.”

— Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center, talking with The Hill about the upcoming battles among Democrats over spending and taxes in the reconciliation bill. Gleckman said it would be “pretty remarkable” if Democrats were able to agree on $1 trillion in new revenue sources, despite the goal among some lawmakers of covering the full cost of a spending package that could total $3.5 trillion.

Supreme Court Strikes Down Biden’s Eviction Moratorium

The Supreme Court on Thursday struck down the Biden administration’s eviction moratorium, ruling 6-3 that the Centers for Disease Control and Prevention exceeded its authority.

“The CDC has imposed a nationwide moratorium on evictions in reliance on a decades-old statute that authorizes it to implement measures like fumigation and pest extermination,” the court’s majority said in an unsigned opinion. “It strains credulity to believe that this statute grants the CDC the sweeping authority that it asserts.”

The court’s three liberal justices dissented. “The public interest strongly favors respecting the CDC’s judgment at this moment, when over 90% of counties are experiencing high transmission rates,” Justice Stephen Breyer wrote in a dissent joined by Justices Sonia Sotomayor and Elena Kagan.

But the majority, ruling in favor of a challenge brought by a coalition of landlords and real estate trade groups in Alabama and Georgia, argued that the legal issue was clear. “It is indisputable that the public has a strong interest in combating the spread of the COVID–19 Delta variant. But our system does not permit agencies to act unlawfully even in pursuit of desirable ends,” the ruling said, adding, “If a federally imposed eviction moratorium is to continue, Congress must specifically authorize it.”

Landlords and realtors hailed the decision.

White House Press Secretary Jen Psaki said in a statement Thursday night that the administration was disappointed. “As a result of this ruling, families will face the painful impact of evictions, and communities across the country will face greater risk of exposure to Covid-19.” She said the president is calling on all entities that can prevent evictions, from cabinet agencies to local courts and landlords, to act with urgency.

The decision wasn’t a surprise: The Biden administration initially said it did not have the authority to extend the moratorium. But facing political pressure to act after lawmakers did not, the CDC announced the new 60-day moratorium on August 3. At the time, Biden himself acknowledged that the move might not be legal, based on a prior Supreme Court ruling. “The bulk of the constitutional scholarship says that it’s not likely to pass constitutional muster,” he told reporters. “But there are several key scholars who think that it may and it’s worth the effort.”

Biden added that part of his strategy was to buy more time for billions in federal aid money to flow to renters.

Why it matters: The court’s ruling may leave millions of renters at risk of eviction as bureaucratic delays have slowed the delivery of the aid money to a trickle. As of the end of July, just over $5 billion of the $46.5 billion in total aid approved by Congress — about 11% — had been distributed to tenants through state and local programs, according to data released this week by the Treasury Department. About $1.7 billion in aid was disbursed last month, up from $1.5 billion in June.

About 3.5 million people told Census Bureau survey takers this month that they were “very likely” or “somewhat likely” to face eviction in the next two months, and some 6 million people are estimated to be behind on their rent, though some tenants may still be protected by state or local eviction bans.

What’s next: The Biden administration and Congress will face renewed pressure to avoid a flood of evictions. The administration announced some new steps to do that this week, and The New York Times reports that “Biden’s team has been mapping out strategies to deal with the likely loss of the moratorium, with a plan to focus its efforts on a handful of states — including South Carolina, Tennessee, Georgia and Ohio — that have large backlogs of unpaid rent and few statewide protections for tenants.”

Programming note: The Fiscal Times newsletter will be back in your inboxes after Labor Day. See you in Stress-tember! Email us at yrosenberg@thefiscaltimes.com.

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