Ahead of a Tuesday meeting with Federal Reserve Chairman Jerome Powell, President Biden laid out a plan in a Wall Street Journal op-ed to fight inflation levels that are topping 8 percent annually and reaching nearly 40-year highs. Biden has said that bringing down inflation is his top economic priority.
The gist of the plan is to get out of the way while the Fed raises interest rates to bolster the purchasing power of the dollar while supporting damaged supply chains to make sure that demand for goods doesn’t outpace their supply.
The plan also talks about bringing down demand by continuing to reduce the federal deficit, which is projected to fall by $1.7 trillion this year, something the White House is happy to show off as a win.
The goal for both Biden and the Fed is a “soft landing” — meaning a drop in prices for American consumers without a drop in overall economic growth. Whether or not they can thread this needle, Biden is emphasizing aspects of the recovery from the pandemic that further his economic agenda. Here are five takeaways from his plan.
Biden needs the labor market to cool and is depending on the Fed
The labor market is a positive for Biden on the economy, but a problem for inflation. Unemployment is now at 3.6 percent, which has led to growth in nominal wages, up well over 5 percent since last year. It’s also given job seekers more opportunity to find a job and extra bargaining power over their employers once they get hired.
But economists say that without higher unemployment rates, or what they call a “looser” labor market, it will be difficult for consumer prices to come down. This is because higher wages and higher employment levels are mutually reinforcing.
“It’s going to be very difficult to get through this now that we have wage inflation running at close to a 6-percent rate and the tightest labor markets we’ve ever seen in our country,” economist and former Treasury Secretary Larry Summers said Tuesday during an online event hosted by The Washington Post. “I don’t see how we can get inflation to substantially decelerate without wage inflation falling substantially.”
“I don’t think there’s a durable reduction in inflation without a meaningful reduction in wage growth,” he added.
Unlike former President Trump, who regularly criticized both Powell and the Federal Reserve, Biden said in his inflation plan that he’s not going to get in the way of the Fed’s interest rate hikes as it seeks to break the cycle of high wages and high employment.
Biden talks a lot about deficit cuts
The deficit is falling and Biden wants to take credit for it. The Congressional Budget Office last week projected that the budget deficit in 2022 will be $1.7 trillion less than the shortfall recorded in the previous year.
But this reduction isn’t due to increased revenues as much as to a waning in the exceptional amount of spending the government did in 2020 and 2021 as a result of the pandemic.
While economists say that deficit reduction is a way to lower demand for goods and thereby decrease inflation, greater revenues are still only a theoretical fix at this point since they require approval from Congress. The tax proposals Biden wanted to put into place in the Build Back Better Act were dead on arrival due opposition from Democratic moderates.
Biden’s proposed minimum income tax for billionaires also faces a thorny legislative path that could additionally face resistance in the courts.
Biden’s revenue proposals are also assured to go nowhere if midterm elections result in Republican majorities in the Senate or House, as many pollsters are expecting.
Biden wants to do something on housing
People are worried about finding a place to live and are seeing rents and home prices rise. Mortgage rates on the standard 30-year fixed rate mortgage have gone above 5 percent for the first time since 2011 and the share of homes owned by commercial property companies, or professional landlords, is on the rise.
Interest rate hikes by the Federal Reserve could also add upward pressure to the housing market and make it more difficult for people to buy homes. Biden gives a nod to more affordable housing in his inflation plan, to show he’s conscious of property prices, which typically constitute one of the largest expenses for American consumers.
Biden’s housing efforts, which aim to build more affordable housing units, may not do much to lower inflation, since they’re sector-specific and aimed more at a symptom of inflation than its causes.
Nonetheless they could still help some people become homeowners, casting Biden as helping lower and middle-income families as well as blue-collar workers.
Moreover, they represent the sort of supply side interventions targeting inflation increasingly discussed by left-wing economists like Joseph Stiglitz.
Russia and China are causing Biden problems
Biden is keen to blame some inflation on the Russian war in Ukraine, which has driven up energy prices and led to a major reshuffling in energy markets, as both the U.S. and now the European Union have announced plans to stop importing Russian energy products. Democrats have been using the phrase “Putin’s price hike” to describe inflation, just as Republicans have coined their own blame-casting portmanteau “Biden-flation.”
The Biden White House has also emphasized the role that supply chain issues in China play in inflation, as the country has faced criticism for enacting strict lockdowns in major cities like Shanghai, which have had affected the Chinese labor markets and global production lines. “Supply chain resilience should be incorporated into the U.S. trade policy approach towards China,” the White House said last year.
While geopolitical trends are certainly not the root cause of inflation, they create a backdrop of uncertainty that can weigh upon investor confidence and jack up the price of energy commodities used in the transportation of goods throughout the economy.
“Nobody can forecast what’s going to happen to oil prices, nobody can forecast what’s going to happen to commodity prices,” Summers said Tuesday. “They’re things that right now are very much in the realm of geopolitics.
There are fears of a recession
Biden’s plan doesn’t talk about the possibility of a recession, but if the Fed’s efforts to raise interest rates and cool the economy don’t work as anticipated, a recession starting later this year or next year could be in the works.
“Recession risks are high,” Mark Zandi, an economist with Moody’s Analytics, said Tuesday. “I would put the odds of a recession beginning in the next twelve months at about one in three, and then probably mostly even odds over the next couple of years.”
“Obviously the problem is high inflation, painfully high inflation, and the Federal Reserve is now working very hard to raise interest rates quickly to slow growth, to quell that inflation. In times past, when we’ve been in this kind of situation, recession often occurs, so we certainly can’t dismiss the possibility of recession at this point,” he added.
Higher interest rates will certainly put downward pressure on inflation, but if the supply chain issues are more intransigent than economists are currently think they are, higher interest rates could further slow an economy that’s already on a path to slowing down.
“It’s hard to find a measure where inflation is going up less than three or four percentage points, and I think that’s the kind of increase in interest rates that at a minimum we’re going to need if we’re going to have a prospect of containing inflation – unless of course the economy heads towards a recession on its own, which given the turbulence in the stock market and given some of the disturbing indicators about consumer confidence, is also a possibility,” Summers said during Tuesday’s event.