The American Rescue Plan is highly unlikely to lead to any durable uptick in inflation or interest rates—the normal indicators of economic “overheating”—and it would be a sign of its success if it did. epi.org/blog/the-u-s-e…
The U.S. economy has run far “too cold” for decades, largely due to the enormous rise in income inequality redistributing income to richer households that save most of their income. Unless inequality is substantially reversed, economic overheating is highly unlikely.
The Fed itself has been far more worried about too-low inflation than overheating in the last decade. They have stressed that their 2% inflation target should not be interpreted as a hard ceiling above which inflation is never allowed to go.
Instead, they have clarified that the 2% inflation target is a “flexible average inflation target” over time. Practically, this implies that long periods of inflation below 2% should be made up by extended periods above 2% before interest rates are raised.
Given that inflation spent most of the past 14 years well below this target, it would take a relatively long period of inflation significantly higher than 2% before the Fed would begin steadily raising interest rates.
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