You know things are getting bad when we get to the "President-summons-Fed-Chief-to-White-House" stage of a crisis. And here we are, with President Biden set to hold such a meeting with Fed Chair Jay Powell this afternoon. The public nature of the event is part of its point; in case there was any doubt, President Biden simultaneously published an op-ed in The Wall Street Journal today titled "My Plan for Fighting Inflation."
His three-point plan places primary emphasis, as it should, on it being the Fed's "primary responsibility to control inflation." Biden pledges that he will let the Fed fight inflation as it sees fit without interfering; the subtext is that he will do so even if their hawkishness slows the economy and further hits the markets into the midterm elections.
Perhaps to illustrate that point, Fed Governor Chris Waller gave a rather hawkish speech yesterday saying he supports half-point rate hikes for "several meetings" and won't take them off the table "until I see inflation coming down closer to our 2 percent target." It confirms what WSJ Fed reporter Nick Timiraos hinted at with a Twitter thread into the weekend--that the market has gotten too dovish in expecting only one or two more half-point hikes.
The second plank of the President's inflation-fighting plan includes a bunch of targeted inflation-fighting measures, like having Congress pass "clean energy tax credits and investments" that he was told will lower household utility bills by $500 a year; going after the ocean freight oligopoly he blames for pushing up shipping costs; building a million houses under a "Housing Supply Action Plan"; letting Medicare negotiate prescription drug prices; and lowering the cost of elder and child care (the latter in particular the subject of much concern that it would raise costs instead).
The trouble here is that many of these problems were worsened by too much stimulus colliding with the aftermath of the pandemic, resulting in demand for energy, goods, and housing snapping back way stronger than markets could handle. Take the refinery shortage, for instance, that's creating gasoline and diesel bottlenecks and further pushing up prices; "Few could have predicted the speed with which the U.S. economy recovered from the initial shutdown," one economist told the WSJ.
Except that several outlier voices have been trying to warn for over a year now that the data was showing a V-shaped snapback while the consensus kept carrying on about "K-shaped" rebounds and warning about "The Second Great Depression." I've written extensively about the work of MKM's Michael Darda, for instance, who has absolutely nailed the tremendous rebound in nominal GDP and warned others were missing it. David Woo left Wall Street in frustration after how little pushback President Biden's $1.9 trillion "American Rescue Plan" garnered last March.
And that's the final point to make regarding the Biden-Powell summit today. It comes as NBC News has released an extensively reported feature piece, called "A Biden White House Adrift." Record-high inflation is one of the biggest challenges mentioned. The piece quotes one anonymous official as lamenting that, like Biden used to say of President Obama, 'everything landed on his desk but locusts.' Except that inflation didn't "happen" to this White House; it was accelerated by the massive American Rescue Plan, which awkwardly remains Biden's "biggest achievement."
"We put gasoline on fire. That's basically what the ARP did," as one policy wonk told Vox earlier this month, citing San Francisco Fed research that it pushed up the CPI by an additional three percentage-points. The Fed itself, however, does bear equal fault for running monetary policy full steam ahead at the same time; this is again made clear in reading through Ben Bernanke's recent book on Fed history, wherein fiscal and monetary policy is most potent--and dangerous--when pointing in the same direction.
The hope now is that fiscal and monetary policy are at least both retrenching, if policymakers truly want to wrestle inflation back down. Remember, this isn't about soaring (or collapsing) lumber prices anymore. It's about a labor market running so hot it's short of millions and millions of workers, which will make everything from childcare to elder care more inflationary in the long run. The President himself writes today that "if average monthly job creation shifts in the next year from current levels of 500,000 to something closer to 150,000, it will be a sign that we are successfully moving into the next phase of recovery."
The third and final plank of Biden's inflation-fighting plan is "to keep reducing the federal deficit." But again, part of that effort is to expand the size of the IRS--to bring in more revenue, obviously--and to raise corporate and individual taxes. The White House is walking a much finer line than many realize here, because higher taxes (and a larger government sector) are a supply-side hit to to the economy right now.
Once inflation gets political, it rarely ends well.
See you at 1 p.m!
Kelly