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Biden Presided Over a Thriving Economy. Now He Needs the Federal Reserve to Cope With the Consequences.

President Joe Biden gave the economy a significant boost, resulting in unprecedented employment creation but also the highest inflation rates in four decades.

He’s now banking on the Federal Reserve to save the day. In 2021, the economy grew at a blazing 5.5 per cent, salary increases have far outpaced those seen before the epidemic, and unemployment has dropped to 3.9 per cent.

Price increases, on the other hand, are cutting into people’s incomes and fueling concerns about the future. As a result, Biden receives little credit for the recent economic expansion.

Worse, while manufacturing and shipping difficulties are sorted out, the White House has limited quick choices for reducing inflation.

Instead, Biden will have to rely on the Fed’s ability to bring prices under control through interest rate rises without jeopardising the economy.

“Patience and the Fed are the only two levers to bring down inflation,” said Jason Furman, a Harvard professor who served as Obama’s top economist and is close to the Biden White House.

Biden Presided Over a Thriving Economy. Now He Needs the Federal Reserve to Cope With the Consequences.
Biden Presided Over a Thriving Economy. Now He Needs the Federal Reserve to Cope With the Consequences.

Fed Chairman Jerome Powell has embraced the challenge, stating on Wednesday that the central bank has “quite a bit of flexibility” to raise interest rates.

Even so, it’s not without risk: When the Fed raises borrowing prices to lower inflation, it has a history of producing recessions, and the stock market has already seen dizzying swings as investors try to figure out what higher interest payments imply for the business landscape.

Biden and his aides have recently become more realistic about the economic issue, rejecting their earlier scepticism of growing inflation and conceding that rising expenses would continue to weigh on the recovery for months.

In a news conference earlier this month, President Trump admitted that the Federal Reserve will have to address the issue of inflation. “The Federal Reserve has a key role to play in ensuring that the increased prices do not become entrenched,” he added.

The president’s domestic programme has been hampered by inflationary fears, which are expected to last at least into the second half of the year, diminishing any electoral benefit Biden would receive for overseeing quick pay increases.

According to a recent Gallup survey, about half of Americans believe inflation is creating financial hardship for their families.

Indeed, salary increases that represent a more productive economy may eventually add to the problem; worker shortages caused by the pandemic may compel firms to hike prices as their labour costs rise, further feeding inflation.

The Labor Department announced on Friday that employers’ compensation expenditures increased by 4% last year, the largest rise in two decades.

The administration is still battling the epidemic, a long-running battle that has left Americans tired and put a cloud over an otherwise booming economy.

The next January jobs report is likely to reveal some temporary damage as a result of Omicron’s decision to keep ill staff at home this month.

Inside the White House, officials are increasingly persuaded that the country’s ongoing health crisis is the single largest factor affecting the nation’s mood and Biden’s popularity ratings.

“Biden isn’t receiving any credit for the strong economic statistics,” said Carly Cooperman, the CEO of Schoen Cooperman Research, a Democratic pollster.

Biden Presided Over a Thriving Economy. Now He Needs the Federal Reserve to Cope With the Consequences.
Biden Presided Over a Thriving Economy. Now He Needs the Federal Reserve to Cope With the Consequences.

“Voters are unlikely to give Biden credit for the country’s great economic development as long as they believe the cost of living and day-to-day costs are high, and their salaries don’t stretch as far as they used to.”

Biden, for one, has made it plain that his administration would do more than wait for the Fed to act. The White House has devoted significant resources to resolving supply chain concerns and promoting manufacturing, as well as vowing to crack down on anti-competitive behaviours that it claims are driving up costs.

On Friday, Biden portrayed his blocked social spending plan as a critical instrument for combating inflation and supporting the economy, claiming that its investments will lower the cost of prescription medications and child care, as well as aid to curb growing costs.

“It’s real, and it’s hurting a lot of people,” he said of the inflation spike during a speech in Pittsburgh. “We need to make things more inexpensive and accessible for working families.”

The government is also attempting to increase its focus on the positive parts of the economy’s trajectory to break through voters’ general feeling of doom, such as rising wages and a lower jobless rate.

A senior White House official added, “It’s critical not to lose the thread.” “We need to attempt to communicate our storey about how our actions have resulted in a really solid economic background.”

Officials feel, however, that it is time for the central bank to change course and begin to rein on spending that has wreaked havoc on supply chains.

“We see the Fed as bringing a huge fire truck to the fire,” the senior official explained, adding that the duty of the administration was to “make sure the best people are driving the vehicle.”

We’re not going to sit next to them and holler ‘left,’ ‘right,’ and so on.”

Powell grabbed the ball on tackling rising prices during his news conference on Wednesday, leaving the door open to whatever action is required to bring inflation down.

“We believe that promoting a protracted expansion, which will need price stability, is the greatest thing we can do to ensure continuing labour market advances,” he added.

“We’ll utilise our instruments to help the economy and maintain a healthy labour market, as well as to avoid greater inflation from becoming entrenched.”

However, at least some aspects of the inflation picture are likely to be beyond the Fed’s control. The price increases are due to soaring demand that has overburdened supply lines, but the Fed can only influence spending or the demand side of the equation.

Consumer demand must remain solid for the recovery to continue.

“The Fed can’t do everything,” Dana Peterson, chief economist at The Conference Board, an organisation that publishes economic data, said.

“Again, some of these pressures are linked to the epidemic.” So the Fed has no say in whether a plant in China opens or shutters.”

Officials at the White House have recently taken heart from little signs of progress, putting their hopes on predictions that inflation may be slashed in half by the end of the year.

Powell expressed hope that supply chain bottlenecks will be resolved in the second half of 2022, while he cautioned that certain issues, such as the semiconductor scarcity pushing higher auto pricing, might take years to overcome.

According to Furman, the government’s haste to keep the economy afloat during the epidemic avoided serious disruptions, but it also means that those who benefitted from the flow of help aren’t fully appreciating the achievements earned under Biden.

As a result, they are hesitant to give him credit for the broader recovery while blaming him for inflation.

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“The administration should do all it can to combat inflation, even if it will have a minor impact,” Furman said. “For much of this year, I believe inflation will be uncomfortably high.”

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