Could inflation sink Biden?

Could inflation sink Biden?

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This was the last thing Joe Biden needed. U.S. March inflation data released Wednesday all but dashed any hopes of a Fed rate cut before September, and perhaps even before the November presidential election. This is bad news for a Democratic turnout operation. From a voter sentiment perspective, the level of U.S. growth doesn’t matter much if interest rates remain at such high levels.

Futures markets are still counting on one or even two reductions this year. But monetary policy could also take a wrong direction. According to Larry Summers, there is now a 15 to 25 percent chance that the Fed’s next move will be to raise rates rather than cut them. (Knowing that you’re a Swamp Notes reader, Larry, I couldn’t fail to notice that you’ve joined the beard-growing movement: the good news is, you can cut it all off in one fell swoop.)

I’m not the person who breaks down inflation numbers for the Swampians. But it’s worth pointing out that headline, core and super-core (services) inflation rates are all moving in the wrong direction. At 3.8 percent, the policy rate is now almost double the Fed’s target. Now, I can pretty much imagine a super interpretive Fed Chairman Jay Powell believing that another Donald Trump presidency would be terrible for inflation – mass evictions, punitive tariffs on all imports, geopolitical uncertainty and political risk. A few rate cuts before November would therefore have a disinflationary effect to the extent that they would strengthen Biden’s chances of re-election. Of course, it’s a fantasy. The Fed is independent and would commit Hara-kiri before betraying any political bias. But I’m not exaggerating the Fed’s electoral influence.

Even so, most voters remain unhappy with the state of the American economy. This has caused great perplexity among political experts who constantly tell Americans that they have never had a better life. Not only is inflation much lower than it was two years ago, they say, but the much-threatened U.S. recession never happened. All of this is true. But if you can’t afford the mortgage on a new house and are still living with your parents or in a crowded rental with your peers, the macroeconomic numbers are little consolation. What would really change your outlook is a drop in interest rates. Conventional political wisdom also frowns upon the median voter’s lack of interest in the future of American democracy. Believe me, I share this existential fear of a possible second Trump term. But most voters are out of touch or view it as “cry wolf” syndrome.

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There are other issues such as abortion, which cuts Biden off, and immigration, which favors Trump, that will influence voter choice and turnout in November. Israel will also play a role. But nothing influences voter confidence as much as the direction of US interest rates.

I have one caveat about this somewhat gloomy prognosis. By 2022, almost all economists predicted that the United States would enter a recession. At the start of this year, the consensus was that the Fed would cut rates six times. This week, that figure had fallen to three reductions. Now it has dropped to zero. In other words, economists have no idea what’s going on. They may now be wrong about the Fed. That’s really all I have.

That said, Soumaya, unlike me, you are a real economist and you have the name to prove it and I know you have a better idea than me of what is going on. My question is: what is behind the stubbornness of US inflation, and could the situation surprise us again in the months to come?

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Recommended reading

  • My column this week looks at America’s coming moment of truth over Ukraine. “The Trump Republican Party treats Ukraine as an enemy and Russia as a friend,” I write. “Defining this position as isolationist is lazy and wrong. She is actively pro-Russian.”

  • Speaking of inflation, my colleague Martin Wolf gives an excellent overview of the new world of high public debt we have entered and its potential inflationary impact. The balance sheet of almost all countries is deteriorating. He ends with a plea for a coordinated global fiscal response, which he probably rightly considers a pipe dream.

  • Finally, read this eye-opening article from Uri Berliner, senior reporter at National Public Radio, about how the institution lost the trust of the American public. This is a familiar, cautionary tale of how ideological power grabs have distorted journalistic values ​​and alienated the consumer. Every journalist should read this.

  • Finally, read everything you can from the latest issue of Foreign Policy, starting with its editor, Ravi Agrawal’s article on India. This comes ahead of what looks like a third consecutive victory for Narendra Modi’s BJP in the upcoming elections – both an impressive feat and a depressing augury of the rise of an illiberal elective autocracy.

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Soumaya Keynes responds

Hi Ed,

First, I appreciated your assessment that economists don’t know anything. Let’s keep expectations at that level, please.

As for the stubbornness of American inflation, I was also unpleasantly surprised. I was at least hoping that the predictions of a “long transitional team” would prove accurate, and that as the disruption of the pandemic Finally If inflation were to subside, inflation would fall to a comfortable level of 2 percent. But while it is true that prices of used cars and plane tickets have fallen, others have not behaved as helpfully.

Among the areas where inflation has remained stubbornly high are housing and so-called “transportation services,” which include auto insurance. I briefly fell down a rabbit hole investigating whether the latter was because electric vehicles are more expensive to repair than their gas-guzzling predecessors. But I got through it by remembering that there is always a story about a particular sector. It is safer to infer that persistent inflation is the result of deeper forces, including surprisingly strong demand.

Of course, conditions could still surprise us in the months to come. Economists don’t know anything, remember?

Your reactions

We would like to hear from you. You can email the team at [email protected]contact Ed at [email protected] and Soumaya on [email protected], and follow them on @SoumayaKeynes. And @EdwardGLuce. We may present an excerpt of your response in the next newsletter

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