On The Money: How demand is outstripping supply and hampering recovery | Montana pulls back jobless benefits | Yellen says higher rates may be necessary

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THE BIG DEAL—How demand is outstripping supply and hampering recovery: The recovery from the coronavirus pandemic has thrown off the balance between supply and demand, creating political challenges for both the White House and Federal Reserve.

A flood of fiscal and monetary aid, an accelerated vaccine rollout and easing COVID-19 restrictions have primed the U.S. for a rebound few anticipated at this time last year. 

But with that growth has come growing pains.

• Businesses hobbled by the economic devastation and disruption of the pandemic are now scrambling to catch up to a sharp rebound in consumer demand.
• Manufacturers are struggling to ramp up production after shutting down factories during the depths of the pandemic, leading to parts shortages, higher prices and shipping delays across the goods-producing sector. 
• And bottlenecks for mechanical parts, computer chips, lumber, rental cars and even ketchup have hindered the ability to meet the new demand.

I explain what’s going on here.

The political dynamic: Many economists say the imbalance is a fleeting, if frustrating, quirk of the coronavirus recession — a sharp, steep downturn caused by a health crisis that will reverse swiftly as the pandemic gets controlled. The supply shortages, however, have put a brighter spotlight on a widely anticipated but politically inconvenient jump in inflation as President Biden and Fed Chairman Jerome Powell make the case against pulling back on government support for the economy.

Where are the workers? It’s also unclear how quickly hard hit industries will be able to fill labor shortages. While COVID-19 has been suppressed enough to drive demand higher, prevailing health concerns and partial school closures are still limiting the supply of workers willing to come back.

Many Republican lawmakers and some business owners have blamed the extension of enhanced unemployment benefits signed by Biden in March for the worker shortage, arguing it disincentivizes work. That’s why Montana Gov. Greg Gianforte (R) announced the state will stop offering expanded unemployment benefits in June and give bonuses to recipients of jobless aid who come back to work to help tackle labor shortages.

• Gianforte said that Montana will end participation in a range of federal programs created in March 2020 by the CARES Act and extended several times throughout the coronavirus pandemic to support millions of Americans forced out of work by COVID-19, the first state to do so.
• Montana will instead use federal funds to give $1,200 bonuses to people who had an active unemployment claim as of May 4, accept a job offer and complete at least four weeks of paid work. 

But Democrats, progressive advocacy groups and many center-left economists say jobless aid likely plays little to no role in why some businesses are struggling to hire.

“There are lots of anecdotal reports swirling around about employers who can’t find workers,” Heidi Shierholz, policy director at the left-leaning Economic Policy Institute, wrote in a Tuesday op-ed. “But a closer look reveals there may be a lot less to this than meets the eye.”

LEADING THE DAY

Yellen says interest rates may need to increase, but isn’t calling for hike: Treasury Secretary Janet Yellen on Tuesday said that interest rates may need to increase to keep the recovering economy from going into overdrive on the heels of significant government spending.

“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy,” she said in response to a question posed by The Atlantic about whether the economy could absorb the large dose of spending President Biden was proposing.

Why it resonated: Some took Yellen’s comments to be a sign of discomfort with Biden’s heavy spending agenda or an intrusion into the Fed’s independence over monetary policy—both of which she has fiercely defended. 

But Yellen clarified her comments in a later appearance at a Wall Street Journal event.

“Let me be clear, it’s not something I’m predicting or recommending,” she said. “I don’t think there’s going to be an inflationary problem, but if there is, the Fed can be counted on.”

The Hill’s Niv Elis has more here.

GOOD TO KNOW

• The International Monetary Fund (IMF) warned Tuesday that a global tax deal is “urgently needed” in order to avoid a potential trade war.
• The trade deficit, the difference between how much the U.S. sells and buys internationally, reached a record $74.4 billion in March, according to Commerce Department data released Tuesday.
• Players associations representing members of the MLB, NBA, NFL and NHL came out Tuesday in support of the Protect the Right to Organize (PRO) Act, a sweeping pro-union bill.

ODDS AND ENDS

• Pfizer’s COVID-19 vaccine earned the company $3.5 billion in the first three months of this year, representing nearly a quarter of its total revenue, the company announced ahead of its earnings call Tuesday.
• Senate Majority Leader Chuck Schumer (D-N.Y.) and Sen. Sherrod Brown (D-Ohio) announced a new $73 billion plan on Tuesday aimed to replace the country’s mass transit buses with clean vehicles.