Biden’s growing medium-term threat: Inflation fears outweigh historical job growth

Polls show that around two-thirds of Americans see the country this way be on the wrong track. Biden’s disapproval rating on the economy is 58 percent, while Republicans have a 54-35 percent lead on this issue. And the University of Michigan’s widely publicized consumer sentiment survey recently fell to its lowest level in more than a decade.

Incumbent parties typically lose House and Senate seats in off-year elections, but reversing that stance could mean the difference between Democrats taking average losses this fall or being eliminated like 1994. And government officials are increasingly worried about the economy as multiple allies say heavy resistance in the midterms.

“Sentiment is just appallingly bad inside and outside the White House,” said Steven Rattner, an investment banker and former Obama administration official who speaks to senior Biden officials.

“If somehow inflation comes down and voter sentiment improves, they can compete,” Rattner said. “If those things don’t happen, the midterms could get frighteningly painful for Democrats very quickly.”

White House officials deny any sense of panic about the economy or its medium-term prospects.

“So many economic indicators are not only extremely good, but better than expected. And we’re recovering so much faster than previous downturns,” said Heather Boushey, a member of Biden’s Council of Economic Advisers.

Boushey acknowledged that inflation – particularly energy prices – is a concern for consumers. But she said it will fade over time, especially now that the Fed is raising rates.

“This recovery is not perfect,” she said. “But then again, none of them ever are.”

The Fed has no choice but to raise interest rates to try to depress prices. But economists who regularly speak to Biden and his advisers say the central bank often gets it wrong on interest rates, overshooting the mark by slamming on the brakes too hard and too quickly, and sending the economy into recession.

“I don’t think there is a readily available magic bullet that can change the perception of the economy,” said former Treasury Secretary Larry Summers, who has criticized some of Biden’s spending plans as inflationary.

Summers commended Fed Chair Jerome Powell for the central bank’s decision last week to hike rates and move to a tougher stance on inflation. The Fed also significantly lowered its forecast for economic growth in 2022 from 4.0 percent to 2.8 percent.

But Summers said he doesn’t think the Fed can achieve what it wants.

They “certainly projected more hawking than they used to, and that’s welcome,” he said. “On the other hand, I don’t think it’s at all realistic to think that you could bring inflation down significantly while keeping unemployment at 3.5 percent for three years.” would be 3.5 percent next year and increase to 3.6 percent in 2024.)

Powell this week expressed confidence that the central bank will be able to contain inflation without triggering a recession, although he said it won’t be easy.

In a speech, he said the Fed’s actions, combined with external economic factors, should help bring inflation back close to the central bank’s 2 percent target over the next three years.

History, he said, offers some “reasons for optimism” that the Fed can achieve the kind of gentle slowdown in the economy that cools price spikes but doesn’t translate into negative growth.

“Some have argued that history increases the odds against a soft landing,” the Fed chairman said at the annual meeting of the National Association for Business Economics. “Soft landings, or at least soft landings, have been relatively common in US monetary history. In three episodes — 1965, 1984, and 1994 — the Fed raised the federal funds rate significantly in response to perceived overheating without inducing a recession.”

Fed officials expect rates to be hiked several more times this year — even though Russia’s invasion of Ukraine has boosted the prices of key global commodities like oil and food, which could weigh on consumer spending and lessen the need for more aggressive Fed action.

For now, the big headlines still look good for Biden. The economy added 678,000 jobs in February, continuing the strong recovery from Covid losses. The unemployment rate is just 3.8 percent. GDP growth is slowing but it was only in the last quarter of 2021 in sterling terms.

But all these headlines can mean next to nothing politically.

A senior Democratic economist speaking with Biden and his advisers said there is frustration in the White House that the administration is getting little credit for good economic news, despite the media’s relentless focus on inflation. But the economist said voters are mad at Biden and the economy.

“One theory I have for this is that some people went back to work after Covid, which they really didn’t want, and would rather stay at home with extra support,” said this individual.

Wage increases are also most noticeable in lower-income brackets, a welcome outcome for Americans most in need of assistance, but less of a political advantage as wealthier households tend to choose more.

The economist added that the White House is also pretty sure Biden won’t get much credit for his plays Invoice infrastructure that he passed.

“Nobody cares about that at all or will even remember it,” the person said. “Just like Obama and the Affordable Care Act did in 2010. And the Fed’s strategy is still ‘Get Lucky’.”

Democrats could point to Wall Street’s remarkably robust performance as a sign of confidence from companies and investors in Biden’s leadership. But many Democrats don’t like to measure success in terms of rising stock prices, which have risen even in the face of rate hikes and a more hawkish Fed. Stock market gains disproportionately benefit higher-income Americans and can contribute to income inequality.

And there are market analysts who say stocks need to be discounted, especially as higher Fed interest rates begin to drag down the housing market, a consistent bright spot in the economy. Interest rates will still be low, but people will still have to pay more for houses.

“It’s ugly for inflation and it’s going to get uglier over the next few months and the Fed could be put in a position where they have to be much more aggressive and that could slow the economy down a lot,” said Edward Moya, a senior market analyst at OANDA, a forex trading company. “Somehow, Wall Street saw through all of this and was able to absorb and believe all of this excitement about the economy.”

White House deputy director of communications Kate Berner said Americans understand some of the reasons for higher prices and still support the underlying policies that help cause or exacerbate them. “They see the US sanctions against Russia and their impact on prices, but they still support the sanctions,” she said.

Biden’s polls on the economy are terrible almost everywhere. But Berner said surveys of people’s own personal finances aren’t that bad. A recently Langer research survey found that people’s sense of their own financial well-being was 61 out of 100. That’s down nearly 10 points from the survey’s pandemic-era bottom in August, but it’s not as weak as some of the other numbers.

And Berner said much of the public’s negativity towards the economy stems from widespread “Covid fears,” which will only subside with time.

Biden’s growing medium-term threat: Inflation fears outweigh historical job growth

Source link Biden’s growing medium-term threat: Inflation fears outweigh historical job growth

Back to top button