Fed Chair Jerome Powell has accepted the task, saying on Wednesday that there’s “quite a bit of room” for the central bank to raise interest rates. But even that isn’t without risk: The Fed has a history of causing recessions when it raises borrowing costs to bring down inflation, and the stock market has already been experiencing dizzying swings as investors parse what higher interest payments might mean across the corporate landscape .
Biden and his advisers have grown clearer-eyed about the economic challenge of late, abandoning their early dismissal of surging inflation and acknowledging that rising costs are likely to weigh on the recovery for months to come. The president acknowledged in a press conference this month that the Fed will have to tackle the inflation problem. “A critical job in making sure that the elevated prices don’t become entrenched rests with the Federal Reserve,” he said.
The inflationary concerns that have dogged the president’s domestic agenda are likely to linger at least into the second half of the year, dampening any political benefit Biden might get for overseeing rapid wage gains. Roughly half of Americans say inflation is causing hardship for their families, according to a recent Gallup poll.
Indeed, those wage gains could eventually contribute to the problem; worker shortages exacerbated by the pandemic might lead employers to raise prices as their labor costs rise, a situation that further feeds inflation unlike pay raises that reflect a more productive economy.
On Friday the Labor Department reported that employers’ compensation costs rose 4 percent last year, the sharpest increase in two decades.
The administration is still struggling to rein in the pandemic — a drawn-out fight that has left Americans exhausted and cast a pall over the otherwise roaring economy. The coming jobs report for January is expected to show some temporary damage from Omicron keeping sick workers at home this month. Inside the White House, aides have become increasingly convinced that the prolonged health crisis remains the single-biggest factor weighing on the nation’s mood — and on Biden’s approval ratings.
“Biden is not getting any credit for the positive economic data,” said Carly Cooperman, a Democratic pollster who is CEO of Schoen Cooperman Research. “As long as voters feel like the cost of living and their day-to-day expenses are high, and that their paychecks don’t go as far as they used to, they are unlikely to give Biden credit for the country’s strong economic growth .”
For his part, Biden has sought to make clear that his administration will do more than wait around on the Fed. The White House has poured energy into fixing supply chain issues and boosting manufacturing, and vowed to take a harder line against anti-competitive practices that it says have driven up prices.
On Friday, Biden cast his stalled social spending bill as a key tool in fighting inflation and further bolstering the economy, arguing that its investments would cut the cost of prescription drugs and child care and help slow down rising prices.
“It’s real and a lot of people are being hurt by it,” he said of the inflation surge during a speech in Pittsburgh. “We need to ease the burden on working families and make everything more affordable and accessible.”
The administration is also trying to ramp up its emphasis on the promising aspects of the economy’s trajectory in hopes of breaking through voters’ broader sense of gloom, highlighting workers’ growing income and the falling unemployment rate.
“It’s important not to lose the thread,” a senior White House official said. “We have to try to tell our story about the extent to which our policies have created an extremely healthy economic backdrop.”
Nonetheless, officials believe that it’s time for the central bank to shift strategies and start to curb the spending that has run headlong into supply chain problems.
“We view the Fed as driving a big fire truck to the fire,” the senior official said, adding that the administration’s job was to “make sure the best people are driving the truck. We’re not going to sit next to them and yell ‘turn left,’ ‘turn right’.”
Powell at his press conference Wednesday grabbed the ball on taking on surging prices, leaving the path open to whatever action will be needed to bring down inflation.
“We believe that the best thing we can do to support continued labor market gains is to promote a long expansion, and that will require price stability,” he said. “We will use our tools both to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.”
At least some of the inflation picture is likely to be outside the Fed’s control, however. The price jumps have appeared because of skyrocketing demand that has overwhelmed supply chains, but the Fed can only affect spending — the demand side of the equation. And healthy consumer demand is key to maintaining the recovery.
“The Fed can’t do it all,” said Dana Peterson, chief economist at The Conference Board, which puts out economic indicators. “Some of these pressures are, again, related to the pandemic. So the Fed can’t control whether or not a factory opens or closes in China.”
White House officials have recently taken heart in subtle signs of improvement, pinning their hopes to forecasts that say inflation could be cut in half by the end of the year. Powell expressed optimism that there will be progress on supply chain snarls in the second half of 2022, though he warned that some problems — like the semiconductor shortage that’s driving up car prices — could take years to resolve.
Furman said the government’s rush to keep the economy afloat during the pandemic averted major disruptions but also meant that people who benefited from the flood of aid don’t fully appreciate the gains made under Biden. As a result, they are loathe to credit him for the broader recovery even as they blame him for inflation.
“The administration should do everything it can on inflation, even though that’s going to add up to a very small impact,” Furman said. “I think inflation will be uncomfortably high for much of this year.”