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Saturday, Jan 28, 2023

Fed's coming interest rate hikes may present another economic challenge for Democrats

Fed's coming interest rate hikes may present another economic challenge for Democrats

In an attempt to curb high inflation, the Federal Reserve is expected this week to begin raising interest rates for the first time in three years.

Amid Russia's ongoing brutal invasion of Ukraine, gasoline prices in the United States have hit an all-time high. Inflation, which polling shows to be Americans' top concern, is also now at a 40-year high.

In an attempt to curb inflation, the Federal Reserve is expected this week to begin raising interest rates for the first time in three years.

The move presents President Biden and Democrats with yet another political challenge from a different end of the economic spectrum than higher prices.

Higher interest rates, after all, will put a strain on Americans looking to borrow. Buying a home or car, or taking out a student or business loan, for example, will all cost more — although even after several expected rate hikes, borrowing costs will remain low by historical standards.

On high prices, Washington is pointing fingers.

Biden says the high gas prices, which for many people are the poster child for overall inflation, are the fault of Vladimir Putin and his assault on Ukraine — and the tough economic sanctions the West has leveled as a result.

"We need to be honest with the American people — the battle for freedom has its costs here at home, as well," Biden said at the Democratic National Committee's winter meeting last week. "People [are] already feeling Putin's price hikes at the pump. I think the American people know how important this fight is. I think they know that as painful as the price is today, the costs are going to be higher if we do not act now to deal with this tyrant."

Vice President Harris echoed that Friday in a news conference in Bucharest, Romania.

"[T]here is a price to pay for democracy," Harris said. "Got to stand with your friends. And as everybody knows, even in your personal life, being loyal to those friendships based on common principles and values, sometimes it's difficult. Often, it ain't easy. But that's what the friendship is about, based on shared values. So that's what we're doing."

Call it a Putin pivot.

Republicans, for their part — with their eyes on congressional control after this year's midterm elections — are continuing to blame Biden for the rising price of gasoline and inflation generally.

Wyoming Republican Sen. John Barrasso, for example, this week labeled Biden "the president of high prices" and called inflation his "defining failure."

Republicans are blaming the nearly $2 trillion relief bill that Biden and congressional Democrats passed a year ago as the main culprit.

"One year after Biden and Democrats passed their $1.9 trillion 'stimulus' bill, they want to tout it as a success," the Republican National Committee said in a statement Friday. "Every Democrat in Congress but one voted for Biden's partisan stimulus. In reality, Biden's stimulus has been anything but a success — it stifled the economic recovery and job growth, while fueling historic inflation, falling wages, and a declining standard of living for Americans."

It's clear that's going to be Republicans' main message heading into this year's elections, and many do put at least some of the blame for inflation on the unprecedented amount of money that was poured into the economy.

But some context:

*  The relief bill also likely fueled strong economic growth. A Brookings Institution analysis projected that the bill would lead to higher economic growth than without the extra funds in people's pockets. And that's what's happened. In 2021, the U.S. saw 5.7% GDP growth, the fastest pace in four decades.

*  The labor market is nearly at full employment. The jobless rate is down to 3.8%, which is nearly back to pre-pandemic levels.

*  Gas prices, while high, are actually below the previous peak, if adjusted for inflation. As of Saturday, gas prices were at about $4.33 a gallon, higher than the $4.14 from July 2008. That, though, would be the equivalent today of more than $5 a gallon ($5.37, according to Fortune.)

Inflation, however, has been stubbornly high — 7.9% higher than a year ago. And the war in Ukraine could make it worse.

The strong economic growth, the bullish labor market and rising inflation are reasons that Fed Chair Jerome Powell gave in late January for the central bank's intention to raise rates.

"[T]he economy no longer needs sustained high levels of monetary policy support," Powell said.

But experts say controlling the pandemic is the real key to truly curbing inflation.

The delta and omicron variants had a disruptive effect on American society, the economy and politics, but "it is reasonable to think that each new wave will be less disruptive to the health-care system and economy than the previous one," Mark Zandi, chief economist for Moody's Analytics, wrote toward the end of last year.

He said that could mean inflation stinging "for another several months, but it should be much less painful a year from now. ... [O]dds are good that the pandemic will continue to recede and inflation will soon move back into hibernation."

But Americans aren't known for their patience, and nuance is lost in political messaging. While our poll found Biden got a bump after the State of the Union address, a majority — 53% — still disapproved of how he's handling the economy.

That makes the economy a tough hurdle for Democrats running for reelection this year.

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