President Biden pledged to let the Federal Reserve do whatever it takes to bring inflation down.
The political implications could be dire.
Fed officials have vowed not to let up in their fight against inflation, even if it means driving the economy toward a recession. The central bank has already boosted interest rates to a range officials believe will slow the economy — and it plans to raise them again before the end of the year, even at an expected cost to the job market.
“If unemployment goes up, that’s unfortunate. If it goes up a lot, that’s really very difficult,” said Charles Evans, president of the Federal Reserve Bank of Chicago, during a Monday conference.
“But price stability makes the future better,” Evans added.
As the U.S. economy slows and the global one faces deeper peril, Biden is facing growing pressure to avert a major slowdown without allowing inflation to spiral higher. But doing so would risk violating his pledge not to interfere with the Fed’s plans — a precedent set by several of his predecessors.
The Fed’s leaders have all but given up on averting an economic slowdown caused in large part by their aggressive interest rate hikes and failure to begin them sooner.
Fed Chairman Jerome Powell, a Republican reappointed by Biden this year, acknowledged there would be “pain” as the bank boosts rates high enough to bring inflation down from four-decade highs. While he said a potential recession may still be mild, he indicated there was no way for the Fed to avert job losses as it ramps up pressure on inflation.
Fed officials have made clear that they will keep raising interest rates until inflation comes down regardless of its impact on the unemployment rate, which they expect to rise next year.
Fed officials see the jobless rate rising to 4.4 percent by the end of 2023, according to projections released last month, up nearly 1 percentage point from the 3.5 percent unemployment rate in September.
That would force at least 1 million Americans out of their current jobs and consign countless more to fewer hours and stagnant wages — all while prices continue to rise.
While a recession is unlikely before the November midterm elections, a downturn in 2023 could be devastating for Biden’s potential reelection bid and the Democratic Party’s congressional hopes.
And though the Biden administration does not control the Fed, the president appointed five of its seven board members to their current positions, tying him to the fate of the bank’s battle against rising prices.
Biden’s political fortunes and the economy at large have already been tested by stubbornly high inflation.
Prices were up 6.2 percent on the year in August, according to the personal consumption expenditures (PCE) price index, the Fed’s preferred gauge of inflation. The Fed aims for annual inflation of 2 percent — less than a third of the current rate.
Monthly inflation also accelerated in August, and economists are bracing for the Thursday release of new consumer price index (CPI) data for September. While the Fed ties its inflation fight to the PCE index, the bank also pays close attention to the CPI for its broader influence over businesses and financial markets.
“Inflation is swiftly moving through the real economy, causing rents to move higher at a time when real wages remain flat at best. These dynamics require the Fed to lift its policy rate,” wrote Joe Brusuelas, chief economist at audit and tax firm RSM, in a Friday research note.
Republicans have been quick to declare the U.S. economy is already in a recession as the midterm elections approach, blaming Biden for high inflation and the rising risks of a downturn.
“The economy is shrinking, inflation is raging, and job growth is slowing,” said Rep. Kevin Brady (R-Texas), ranking member on the House Ways and Means Committee, in a Friday statement.
“No wonder so many Americans have lost faith in President Biden’s competence to heal the economy.”
The White House and Democrats acknowledge that inflation is a problem, but have pointed to a historically strong job market, steady consumer spending and prospects of lower prices ahead to dispel GOP claims of doom. The U.S. has added 420,000 jobs on average each month in 2022, and total employment is well above its pre-pandemic level.
“Our economy created 263,000 jobs last month. That’s 10 million jobs since I’ve come into office. That’s the fastest job growth at any point of any president in all of American history. Historic progress,” Biden touted in a Friday speech after the release of the September jobs report.
While the Fed is set to stay on track for higher rates, some U.S. officials both within and outside of the bank have raised the chance it may need to ease its fight against inflation.
Treasury Secretary Janet Yellen, who chaired the Fed from 2014 to 2018, warned last week that the bank’s rate hikes “can have international spillovers,” causing deeper pain and another drag on the U.S. economy through a global recession.
Fed Vice Chair Lael Brainard also nodded toward the risks abroad posed by the bank’s interest rate hikes, which could come home and hurt the U.S. if the global economy turns south.
“The combined effect of concurrent global tightening is larger than the sum of its parts,” Brainard said.
“The Federal Reserve takes into account the spillovers of higher interest rates, a stronger dollar, and weaker demand from foreign economies into the United States, as well as in the reverse direction.”