Whether he deserves it or not, President Biden is blamed for high inflation destroying family budgets. Republicans argue that the massive COVID relief bill that Biden championed and signed into law in 2021 flooded too much money into the system, boosting demand and therefore prices. That’s a stretch, but voters won’t parse the details, and they’re set to knock out Biden’s Democrats in the Nov. 8 midterm election.
Biden knows inflation is a threat to his presidency. He released oil from the strategic reserve to drive down gasoline prices and pursued other measures to reduce drug and health care costs. At campaign events, Biden tells voters that other laws he has signed recently will help lower prices in 2023 and beyond.
One thing Biden never addresses, however, is his own culpability in the Federal Reserve’s belated efforts to raise interest rates and tame inflation. It’s the Fed’s job to fight inflation, not the president’s, and the Fed started raising interest rates in March of this year. But that was almost a year after inflation started to rise above normal levels. At the end of 2020, inflation was negligible at 1.3%. By June 2021, it had reached 5.3%, well above the Fed’s 2% target. Yet the Fed did nothing for another 9 months. Why did he wait so long?
There was a feverish debate in the summer of 2021 over whether inflation was transitory or permanent. Biden insisted it was transitional, and Fed Chairman Jerome Powell basically agreed. Financial markets also failed to sniff out stubborn inflation, with stocks and other inflation-vulnerable assets hitting new highs towards the end of 2021 as if all was well.
We now know that this view was wrong and that the Fed should have acted sooner. But in the middle of the second estimate, an explanation for the Fed’s delay was overlooked. Powell was a Donald Trump appointee whose first term ended in February 2022. He wanted a second term and was basically competing for the position as inflation rose in the middle of 2021. Powell was not a shoo -in. Biden reportedly considered Fed Governor Lael Brainard for the job, which would have allowed Biden to reshape the central bank and install a leader seen by some as less traditional and more progressive than Powell.
If Powell had started raising rates in mid-2021, Biden could very well have decided that Powell was being too hawkish and unnecessarily slowing the economy. That could have swung the job to Brainard, who is now vice chairman of the Fed. So Powell may have had personal reasons for delaying rate hikes.
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“If Powell had chosen to launch a cycle of interest rate hikes, it is entirely possible, if not likely, that Biden would have replaced him with another president, possibly Lael Brainard,” the AFP recently wrote. Harvard economist Kenneth Rogoff in Foreign Affairs. “The Fed held back from raising rates and Biden eventually reappointed Powell. It was only then, with Powell comfortably in his new term, that the Fed finally raised interest rates in the spring of 2022. »
What Biden could have done differently, to ensure the Fed was free to act, was to reappoint Powell sooner. In fact, Biden didn’t announce Powell’s reappointment until November 22, 2021. By then, inflation had reached 6.8%. The Fed normally signals major changes in monetary policy in advance, to avoid market shocks. This moment set the stage for the first rate hikes in March 2022, once Powell was safe in his job and the Fed had made its intentions clear. At that time, inflation was 8.6%.
It’s impossible to know what might have been different had Biden reappointed Powell in, say, June or July 2021. There’s no guarantee the Fed would have started to hike sooner. If that were the case, however, it could have meant significantly lower inflation by the crucial November 8 deadline, the day of the midterm elections. Inflation fell from the June peak of 9%, but only to 8.2%. Investors were hoping for faster progress, one of the reasons for stock market rallies that are running out of steam as inflation data continues to be hotter than expected.
The Fed is operating with a lag, and in a few months there could be more progress against inflation, with the year-over-year rate well below 8% and possibly below 7%. How Biden would love to have those numbers today! In mid-2021, Biden probably didn’t think 8% inflation would knock congressional Democrats out of power. Now that seems likely. Elections are sometimes based on decisions not made and on developments that politicians could have foreseen but did not.
Rick Newman is a senior columnist for Yahoo finance. Follow him on Twitter at @rickjnewman
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