In a significant shift from the previous administration, US President Joe Biden on Tuesday assured Federal Reserve (Fed) Chair Jerome Powell would have freedom from political interference, as he met the central bank chief to plot a strategy to fight historic inflation that is draining American wallets.
The first meeting between the two since Powell’s confirmation for a second term by the Senate earlier this month comes as rising gasoline, food and consumer goods prices have sent inflation to 40-year highs.
The relentlessly rising prices have forced the Biden administration to walk back its previous statements that the surge in inflation was temporary, with the fate of the economy and Biden’s own political prospects increasingly dependent on the actions of the government’s central bank.
Treasury Secretary Janet Yellen on Tuesday evening said she did not fully understand the impact that unanticipated large shocks and supply bottlenecks would have on the economy.
Biden hoped to demonstrate to voters that he was attuned to their worries about higher gasoline, grocery and other prices whilst still insisting an independent Fed will act free from political pressure.
Like Biden, the Fed wants to slow inflation without knocking the US economy into recession, a highly sensitive mission that is to include increasing benchmark interest rates this summer.
The president said he would not attempt to direct that course as some previous presidents have tried.
“My plan to address inflation starts with a simple proposition: Respect the Fed, respect the Fed’s independence,” Biden said.
Running out of options
The sit-down on a heat-drenched late-spring day was Biden’s latest effort to show his dedication to containing the 8.3% leap in consumer prices over the past year.
Rising gas and food costs have angered many Americans heading into the midterm elections, putting Democrats’ control of the House and Senate at risk.
Biden is running out of options on his own. His past attempts by him – oil releases from the strategic reserve, improving port operations and calls to investigate price gouging – have failed short of satisfactory results.
High prices have undermined his efforts to highlight the low 3.6% unemployment rate, leaving a growing sense of pessimism among Americans.
Tuesday’s meeting also represented something of a reversal by Biden as inflation weighs heavily on voters’ minds. The president asserted in April 2021 that he was “very fastidious about not talking” with the independent Fed and wanted to avoid being seen as “telling them what they should and shouldn’t do.”
The White House, along with the Fed, initially portrayed the inflation arising as a temporary side effect caused by supply chain issues as the US emerged from the pandemic.
Republican lawmakers were quick to criticize Biden’s $1.9 trillion coronavirus relief package from last year as pumping too much money into the economy and causing more inflation. That narrative also has held some sway with leading economists who say the financial support was excessive even though it helped the job market roar back.
Yellen on Tuesday admitted she was wrong in the past about the course of inflation, but said taming price hikes is Biden’s top priority and he supports the Fed’s actions to achieve that.
“I think I was wrong then about the path that inflation would take,” she told an interview with CNN when asked whether she was wrong to downplay the threat that inflation posed in public statements over the past year.
“But we recognize that now the Federal Reserve is taking the steps that it needs to take. It’s up to them to decide what to do,” she added.
Inflation has shown signs of moderating but is likely to remain far above the Fed’s 2% target through the end of this year. Gas prices are expected to keep rising, particularly now that the European Union has agreed to cut off 90% of its oil purchases from Russia.
That will force the EU to buy more oil from elsewhere, and it drove oil prices to $115 a barrel Tuesday.
This was only the fourth meeting between the president and the Fed chair, though Powell breakfasts as often as once a week with Yellen, who also attended Tuesday’s meeting along with Brian Deese, the White House National Economic Council director.
Biden’s dealings with Powell stand in sharp contrast to former President Donald Trump’s approach, which involved routinely punishing Powell for the Fed’s interest-rate decisions and even threats to fire him.
Ahead of the meeting, Biden suggested that he and Powell were aligned on addressing inflation.
“My predecessor demeaned the Fed, and past presidents have sought to influence its decisions inappropriately during periods of elevated inflation,” Biden said in an op-ed posted Monday by The Wall Street Journal.
“I won’t do this. I have appointed highly qualified people from both parties to lead that institution. I agree with their assessment that fighting inflation is our top economic challenge right now.”
In contrast, Trump repeatedly attacked Powell after the Fed chair oversaw moderate interest rate hikes in 2018 and continued his public criticism even as Powell cut rates in 2019.
Biden’s endorsement of the Fed’s policies – a stance echoed by congressional GOP leaders – gives Powell important political cover for a series of sharp interest rate hikes intended to rein in higher prices. Yet the higher rates could cause layoffs, raise the unemployment rate and even tip the economy into recession.
no pain no gain
The Fed hopes inflation will moderate on its own, as companies sort out supply chain issues complicated by the pandemic, for example, and consumers shift spending toward services.
But Powell has also made it clear that the Fed is no longer counting on that, and will ratchet interest rates as high as needed.
He sees high inflation as the chief economic risk facing the country, and controlling it as the Fed’s top priority during his second term, even if the process proves painful to households and firms, and pushes the unemployment rate a bit higher.
The Fed has already raised interest rates by 3/4 of a percentage point this year. Most Fed policymakers say they expect to continue to raise rates until they reach around 2.5% by the end of this year, and further if needed. The planned rate hikes will include a half percentage point increase at both their June and July meetings.
Amid worries that the US economy may repeat the high, persistent inflation of the 1970s, the cooperation between Biden and Powell represents a crucial difference from that time and could make it easier for the Fed to restrain higher prices.
In the early 1970s, President Richard Nixon pressured Fed Chair Arthur Burns to lower interest rates to spur the economy before Nixon’s 1972 reelection campaign. Nixon’s interference is now widely seen as a key contributor to runaway inflation, which remained high until the early 1980s.
“That’s why comparisons to the 1970s are wrong,” said Sebastian Mallaby, a senior fellow at the Council on Foreign Relations and author of a biography on former Fed Chairperson Alan Greenspan, “The Man Who Knew.” “The president’s essay was striking because he explicitly backed the Fed.”
Fears of recession
Biden faces an increasingly global challenge as energy and food costs have jumped after Russian President Vladimir Putin ordered the invasion of Ukraine in February. Simultaneously, China imposed lockdowns tied to coronavirus outbreaks that further strained supply chains.
This has left the EU nursing record inflation and the risks of a recession, while US consumers are increasingly disgruntled by gas prices averaging a nominal record of $4.62 a gallon.
Powell has pledged to keep ratcheting up the Fed’s key short-term interest rate to cool the economy until inflation is “coming down in a clear and convincing way.” But those rate hikes have spurred fears that the Fed, in its drive to slow borrowing and spending, may push the economy into recession.
That concern has caused sharp drops in stock prices in the past two months, though markets rallied last week.
Biden, in his op-ed, indicated that the record-setting pace of job creation in the aftermath of the pandemic would slow dramatically, suggesting more moderate levels of 150,000 jobs per month from 500,000.
That, he said, would be no warning of weakness but “a sign that we are successfully moving into the next phase of recovery – as this kind of job growth is consistent with a low unemployment rate and a healthy economy.”