Analysis: Biden and Democrats need moderate Republican Powell to fight inflation

U.S. President Joe Biden meets with Federal Reserve Chairman Jerome Powell and U.S. Treasury Secretary Janet Yellen to discuss the economy in the Oval Office of the White House in Washington, DC, U.S. May 31, 2022. REUTERS/Leah Millis

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WASHINGTON, July 25 (Reuters) – Ahead of a crucial midterm election, U.S. President Joe Biden is leaning heavily on one man, moderate Republican and Federal Reserve Chairman Jerome Powell, to tackle the biggest problem that worries voters: inflation.

For much of American history, the president relying on the management of the world’s largest economy by a Federal Reserve official appointed by the opposition political party would be unremarkable. But the hyper-politicization in Washington makes the Biden-Powell relationship unusual and likely to be tested in the months ahead.

White House officials believe the Nov. 8 midterm elections for control of Congress will be a referendum on Biden’s handling of consumer price spikes — an issue Powell has more tools to contain than administration.

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But the Fed’s painful inflation remedy threatens to undermine consumer demand and put Americans out of work. The Fed is expected to raise rates again on Wednesday by 75 basis points, accentuating the central bank’s abandonment of the ultra-accommodative policies launched after the COVID-19 pandemic.

“Joe Biden and Jay Powell understand that they need each other,” said Sarah Binder, a political science professor at George Washington University who studies the relationship between presidents and the Fed. “The Fed needs the White House to support these policy choices that could push the economy into a recession.”

Rates are now set above 1.5%, from near zero in March, as the Fed targets consumer inflation above 9%, punishing the housing market and forcing leaders to reconsider investments and hires. Biden’s approval has fallen to an all-time high of 36%, according to a Reuters/Ipsos poll, as voters are more concerned about inflation than other political issues. Read more

Powell’s big challenge now is to determine how far to go to contain inflation and whether to stick with aggressive rate hikes at the expense of scaring markets or causing a recession.

Biden, wedded to Powell’s decisions after replacing Donald Trump’s chosen lawyer as Fed chair in November, has no choice but to wait for the results.

Gary Richardson, an economics professor at the University of California, Irvine, said the bipartisan approach was meant to shield the Fed from political pressure.

But inflation tends to “create a lot of problems for incumbent politicians and it has been a constant for centuries. It will be the same in November.”

BIDEN BACKS TRUMP NAMED

After months of deliberation, Biden left the Federal Reserve policy portfolio with Powell, even without a clear idea of ​​how the official first chosen and then bullied by Trump would handle inflation.

Powell, a DC-area native, has followed a well-trodden path to influence, including stops at Wall Street, the Treasury and a centrist think tank. Read more

Biden’s choice was primarily an endorsement of Powell’s previous experience and management. It was also a nod to Biden’s belief that the Fed could distance itself from the polarization highlighted by court rulings and Republican opposition in Congress to Democratic bills. Read more

The Powell selection, which has been well received by financial markets, also gives Biden a scapegoat in case something goes wrong, analysts said. Democrats and Republicans alike are likely to pounce on Powell if they see any hint that he is toeing a political line.

If the Fed chief is partisan, he has shown little sign of it within a largely consensual Fed.

In his first year as president in 2018, Powell continued the policy begun under his predecessor Janet Yellen, a Democrat currently Biden’s Treasury secretary, of raising rates from near zero as the economy recovered. of the Great Recession of 2007-09, boosting Trump. anger. Read more

The following year, the Fed cut rates again on fears of slowing growth, a greater focus on jobs, and the belief that inflation might be too low.

The White House was aware that its Fed nominees announced from November to January were undecided then about whether the price hikes should be corrected by significantly tighter monetary policy, an administration official said.

“It is the main task of the Federal Reserve to control inflation,” according to a White House official. “They are a well-qualified and serious group with immense experience.”

In retrospect, the Fed, administration officials and most economists failed to anticipate the persistence of inflation amid continued supply constraints and emerging issues like the war in Ukraine.

Now the Fed is poised to be on a tightening path not seen since former Chairman Paul Volcker’s inflation battle in the 1980s.

“My plan is to fight inflation,” Biden said ahead of a private meeting with Powell in May. “It starts with a simple proposition: respect the Fed and respect the independence of the Fed, which I have done and will continue to do.”

“I hear that and I think blame avoidance,” Binder said. “Put the blame on the Fed, tell the Fed, it’s your job.”

Blaming the other is an age-old practice in Washington, and the Fed would not be immune to criticism regardless of the political affiliation of its leader. And while that may not be Biden’s style, other Democrats less keen on being sympathetic to Republicans might criticize Powell.

For its part, the administration hopes that the measures it is taking to decongest ports, reduce the price of transoceanic shipping and lower gasoline prices with releases of strategic reserves, for example, can allow the Fed to more easily curb inflation without raising rates too high, according to a person familiar with the thinking of officials, solving the inflation problem without causing a growth problem.

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Reporting by Trevor Hunnicutt; Additional reporting by Andrea Shalal and Howard Schneider; Editing by Heather Timmons and Andrea Ricci

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