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Friday, May 20, 2022

Why Biden should trust the Federal Reserve – Economy

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The US Congressional election is still nearly 240 days away, so it’s too early for projections or even results. But early forecasts for the outcome of elections have been out for a long time, emblazoned on tens of thousands of billboards across the country: Florida, for example, reported a smooth 5.00 this week, Illinois broadcast values ​​up to 5.33, California even up to 6.07.

These are the prices for a gallon of premium petrol (3.8 litres), and while German motorists can only laugh at the average cost of around €1.15 per litre, it does not bode well for President Joe Biden and his match. Because with all the own goals the Democrats have scored since their election victory 16 months ago, with all the global political crises for which they are not responsible: What really threatens to break their neck on November 8 is the high rate US inflation is rising is rapidly approaching the eight percent mark.

Monetary Policy: Guardian of Price Stability: US Federal Reserve in Washington.

Guardian of price stability: US Federal Reserve in Washington.

(Photo: OLIVIER DOULIERY/AFP)

With hardly any means of stemming the trend himself, Biden has no choice but to rely on an instrument that party strategists would have thrown their hands over: interest rate hikes by the Federal Reserve. US (Fed). His goal is to help dampen the economic boom fueled by billions in corona aid packages and prevent the development of a spiral of permanent wage and price increases. Whether and when the Fed will initiate the change of course will be decided this Wednesday at the ordinary meeting of its monetary policy committee in Washington.

Almost all pundits assume that Fed Chairman Jerome Powell and his colleagues will follow through on his latest suggestions and raise the so-called target range overnight by a quarter point from the current zero to 0.25. percent and then to 0.25 to 0.5 percent. That doesn’t seem like much and, in fact, initially it would hardly have any direct effect on economic and price developments. But it would send a clear signal to consumers, businesses and politicians that the Fed, after months of dithering, is now taking the risk of inflation seriously. In addition, the central bankers had already indicated at the end of January that this initial increase should be followed by several more in the course of this year. However, that was before the Russian invasion of Ukraine.

Meanwhile, the wave of inflation has gripped much of the US economy.

If the Fed really kicks off the end of the zero interest phase, not only Biden but most pundits would agree. Because the wave of inflation in the US is now so broad that it can hardly be explained by the pandemic and associated global supply bottlenecks alone. According to a summary of the news agency. Bloomberg nearly two-thirds of all goods and services included in the consumer price index calculation cost at least four percent more in February than in the same month last year. In January, the rate was still below 50 percent.

What worries the Fed even more, however, is that hundreds of thousands of Americans seem to have permanently turned their backs on the job market during the pandemic. This exacerbates the skills shortage that already exists in the country, and especially at a time when, after two years of restrictions, consumers are more willing than ever to spend some of their savings. The result is employers outdoing each other with pay raises, bonuses, and starter candy. Some companies pay job applicants hundreds of dollars just to show up for an interview.

Monetary Policy: Almost all pundits assume that central bank Chairman Jerome Powell and his colleagues will follow up on their recent suggestions with actions.

Almost all experts assume that Fed Chairman Jerome Powell and his colleagues will follow up their recent suggestions with actions.

(Photo: JONATHAN ERNST/REUTERS)

For Biden, the salary increase in the accounts of many citizens is basically good news, and the central bankers who surround Powell, contrary to all clichés, are by no means gray and unempathetic servants who would not care about prosperity. and the affliction of common employees. . However, if companies try to win back higher wages by further raising their selling prices, then the dreaded spiral is set in motion, which can only be stopped by an emergency brake of monetary policy and subsequent recession. To avoid this, the Fed relies on steady but small rate hikes that make credit more expensive and ideally slow the boom gently and in a way that protects the economy.

In the worst case, the Fed triggers the very recession it really wants to avoid

As if this tightrope walk wasn’t difficult enough, Russia’s war on Ukraine and its global economic shockwaves now add to the mix. The immediate economic fallout for the US is likely to be comparatively minor at first, because, unlike many EU countries, Americans hardly import energy and agricultural products from the two warring countries. However, global price increases for oil, gas, coal, wheat, corn, and many other commodities will also trickle down to the United States and further increase inflationary pressures there. In addition, some US industries, such as the auto industry, rely heavily on raw materials from Russia and Ukraine, such as nickel and palladium. And stock markets could also play a disastrous role: if they continue to crash due to ongoing political conflicts between the US and the EU on the one hand and Russia and China on the other, the buying mood of American citizens fast.

In a worst-case scenario, the Fed would raise interest rates just as the seemingly strong post-coronavirus economy began to weaken again. In view of record inflation, doing nothing is probably not an option either. However, if monetary policymakers don’t act cautiously, they may end up triggering the very recession they really wanted to avoid by raising interest rates.

Given the problems, Biden has already crafted a communication strategy that should work if prices continue to rise: Core message: Vladimir Putin is to blame! However, he cannot scare off opposition Republicans, who want to take back both the House and Senate from Democrats in November, with this slogan. On the contrary, his rallying cry may be even more appealing to American voters. He says: Joe Biden is to blame!


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