US President Joe Biden has signed the $1.9 trillion coronavirus aid bill into law, saying he is taking aggressive action to speed up COVID-19 vaccinations and move the country closer to normality by July 4.
The package provides $400 billion for $1,400 direct payments to most Americans, $350 billion in aid to state and local governments, an expansion of the child tax credit and increased funding for COVID-19 vaccine distribution.
So while the Americans begin to receive another $1,400 checks, we break down the significance of this package.
What do stimulus packages aim to do?
A stimulus package is a package of economic and financial measures put together to stimulate an economy that is in the midst of a slowdown. Its objective is to boost employment and spending.
It works on the fundamentals of Keynesian economics: Increased government spending makes up for decreased private expenditure, which boosts the overall aggregate demand and bridges the output gap.
The output gap is the difference between how much the economy is producing and how much it is ideally capable of producing.
What is the composition of the $1.9 trillion stimulus package?
According to a report by policy think tank Brooking, this is what the break up is:
$750 billion for COVID-19 containment and vaccination, aid to state and local governments, and increased federal spending: this category includes both the direct $350 billion in state and local aid, as well as money for vaccination, testing and tracing, and reopening schools;
$600 billion as direct aid to families: this category includes the $1400 per person rebate checks and the child tax credit expansion;
$400 billion as an aid to financially vulnerable households: this category includes the additional $400 per week in unemployment benefits and the extension of the pandemic unemployment programs; and
$150 billion as an aid to businesses: this category includes loans and grants to small businesses and paid sick leave.
How will the stimulus package affect US GDP growth?
Analysts estimate that additional spending of a trillion-dollar could add two percentage points to US GDP growth over the next two years. This would reduce unemployment and push inflation towards the Fed's 2 percent target.
That is because people and firms which receive the aid will buy more goods and services. In turn, businesses will have to raise production and hire more workers. Increased production will boost GDP and also push prices higher.
How have markets globally reacted to the stimulus package?
When the package was first announced in February, global markets were upbeat. Because a buoyant US economy is good for global trade, as there will be increased demand for goods and services from emerging markets.
But now, markets are realising that a buoyant US economy also means higher inflation in the US. This has led to bouts of sell-offs in emerging markets, India included, since the last week of January.
How does a stimulus package for the US economy impact the dollar and interest rates?
Since the pandemic hit the US, the abundance of fiscal and monetary stimulus has helped weaken the US Dollar index from a high of 102 to a low of 90 points.
Theoretically, a $1.9 trillion stimulus should mean a lower USD. Since Biden is supplying dollars into the economy, the increase in supply should decrease demand in markets, further pushing the value lower. However, expecting this stimulus package to have the same impact as the first one would be naïve.
Fed's accommodative stance, combined with the falling US dollar, might prompt it to rise.
How does the strength or weakness of the dollar affect the demand for other asset classes?
Typically, when yields on the US Treasury rise, investors shift a portion of their assets into US debt. They do this by pulling out money from other assets classes, like emerging market equities and gold. This strengthens the dollar, and in turn, and benefits export-oriented firms, which earn a bulk of their revenues in that currency.
Usually, a weak dollar results in strong commodity prices and a strong dollar causes commodity prices to soften. But currently, commodity prices are rising, partly due to supply disruptions and partly due to increased demand as a result of economic activity picking up everywhere.