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President Joe Biden emphasized his support for the U.S. Federal Reserve’s effort to control inflation by raising interest rates and emptying its bond portfolio, indicating he will not charge the Fed a political price for boosting borrowing costs.
Bringing down inflation is his administration’s “top economic challenge,” Biden said in his remarks, after polls show Democrats will take a drubbing in this fall’s Congressional elections because of high prices.
Biden pledged action to tackle inflation but stressed the Fed’s “primary role” in that struggle.
While many economists doubt the Fed can manage a “soft landing”—quelling inflation without causing a recession—the task is “not insurmountable,” John Williams, president of the Federal Reserve Bank of New York said in a public statement last week.
“Our monetary policy tools are especially powerful in the very sectors where we see the greatest imbalances and signs of overheating, such as durable goods and housing,” he said.
“Higher interest rates will cool demand in these rate-sensitive sectors to levels better aligned with supply,” he predicted.
“This also will turn down the heat in the labor market, reducing the imbalance between job openings and available labor supply,” he added.
PUBLISHER’S NOTE: We do not share Williams’ optimism about the Fed’s skills or judgment.
The central bank failed to use its “tools” throughout 2021, when a strong hand against inflation was needed.
Now it must play catch-up, which, to be successful, would mean raising rates high enough in the short term to deal a blow to the economy, pushing it into Dragflation: Declining economic growth and rising inflation.
TREND FORECAST: The Fed will continue to raise interest rates, but not enough to halt inflation or tank the economy. Instead, it will raise rates while hoping that enough of inflation’s other drivers—in particular, supply chain tangles and consumers’ voracious appetite for buying things—wane at the same time.
However, as we have forecast, should the markets and economy quickly tumble, the Fed will ease up on its rate hikes.
And, prior to the 2024 Presidential election, we forecast interest rates will decline in an effort to pump up the economy before the voters go to the polls. Remember, “It’s the economy, stupid,” and the pocketbook is the main issue of the masses.