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Illustration: Sarah Grillo/Axios

President-elect Joe Biden's $1.9 trillion stimulus proposal has economists and bullish market analysts revising their U.S. growth expectations higher, predicting a reflation of the economy in 2021 and possibly more booming returns for risk assets.

Yes, but: Others are warning that what's expected to be reflation could actually show up as inflation, a much less welcome phenomenon.

On one side: Economists at Goldman Sachs raised their 2021 U.S. GDP forecast to 6.6% — a full 2.5 percentage points above consensus — and are projecting an unemployment rate of 4.5% at the end of 2021, down from 4.8%.

  • Goldman's economists are further expecting to see 4.3% GDP growth in 2022 as well as nominal disposable income growth of 4.5% next year.
  • The predictions are well above the already rosy consensus of most economists.

Between the lines: Goldman's economists have consistently been above consensus in their projections for the U.S. economy's rebound from the coronavirus pandemic. And they've largely been correct.

On the other side: "Right now everybody thinks we’re going to get reflation — that’s real growth going forward," Jim Bianco, president of Bianco Research, told me on the latest Voices of Wall Street podcast.

  • "If that morphs itself into inflation that could be [a problem] for financial markets throughout the second half of the year."

Why it matters: Investors warn that rising inflation threatens the real economy and the stock market.

  • "If we get to 2.6% or 2.7% on the core [inflation] number that’s the highest level we would have in 30 years," Bianco noted.
  • "With the 10-year yield at 1.1% and with the stock market at a new high and a forward P/E ratio of 24 [times earnings] that’s going to be a problem for risk markets to see that kind of level of inflation even if the Fed says that they want that level of inflation."

What to watch: Even though Fed chair Jerome Powell and other top officials have said they welcome inflation, Bianco warns they are not in charge.

  • "If you look at the policy shifts from the Fed … the last two times the Fed has changed policy the market has forced it on them and forced it on them rather quickly," he added.
  • The Fed "can lay out all the plans in the world that they want as long as the market is in agreement with them. But if the market ever changes its mind the Fed is within days of changing policy."

With a vaccine boosting demand and continued supply chain disruption threatening supply, inflation is a real threat and a worry for many sectors of the economy, says Danielle DiMartino Booth, CEO of Quill Intelligence.

What we're hearing: "What happens to housing and everything that we’ve poured into housing if mortgage rates come off their record lows?" DiMartino Booth, a former staffer at the Fed, told me on the Voices of Wall Street podcast.

  • "I think that’s the last thing that Jay Powell wants. Especially if you’re looking at what happens to risky assets because the world is not prepared for higher interest rates."
  • "The Fed should be extremely careful of saying that it wants inflation … once the genie gets let out of the bottle the Fed’s not going to have a say in where inflation goes and I don’t think policymakers understand that."

Go deeper

Dion Rabouin, author of Markets
Jan 28, 2021 - Economy & Business

How GameStop exposed the market

Illustration: Eniola Odetunde/Axios

Retail traders have found a cheat code for the stock market, and barring some major action from regulatory authorities or a massive turn in their favored companies, they're going to keep using it to score "tendies" and turn Wall Street on its head.

What's happening: The share prices of companies like GameStop are rocketing higher, based largely on the social media organizing of a 3-million strong group of Redditors who are eagerly piling into companies that big hedge funds are short selling, or betting will fall in price.

Dion Rabouin, author of Markets
40 mins ago - Economy & Business

The Fed could be firing up economic stimulus in disguise

Federal Reserve governor Lael Brainard at a "Fed Listens" event. Photo: Eric Baradat / AFP via Getty Images.

Even as global growth expectations increase and governments pile on fiscal spending measures central bankers are quietly restarting recession-era bond-buying programs.

Driving the news: Comments Tuesday from Fed governor Lael Brainard suggest the Fed may be jumping onboard the global monetary policy rethink and restarting a program used following the 2008 global financial crisis.

Democrats' hypocrisy moment

Illustration: Eniola Odetunde/Axios. Photo: Ray Tamarra/Getty Images

Gov. Andrew Cuomo should be facing explicit calls to resign from President Biden on down, if you apply the standard that Democrats set for similar allegations against Republicans. And it's not a close call.

Why it matters: The #MeToo moment saw men in power run out of town for exploiting young women. Democrats led the charge. So the silence of so many of them seems more strange — and unacceptable by their own standards — by the hour.