As Biden fights inflation, economists warn his weapons for this battle look ‘extremely limited’


President Joe Biden says fighting high inflation is his “top domestic priority” and his administration has promoted the moves it is making to help Americans with rising costs.

Other steps include a housing plan that increases funding for prefabricated homes, a solution to a failure of Obamacare that should reduce the health care costs of some 5 million Americans, and additional student loan efforts, such as now cancel the debt of 40,000 borrowers and correct past mistakes that denied credit to 3.6 million borrowers for forgiveness.

Economists continue to warn, however, that every president, whether a Democrat or a Republican, does not have the powerful weapons to fight high prices. They are reiterating a view they expressed three months ago, before Biden spoke about his efforts to tackle inflation in his State of the Union address.

“A president has an extremely limited range of steps that can be taken to deal with this kind of inflationary shock caused by geopolitical events,” Joe Brusuelas, chief economist at RSM US, told MarketWatch in an interview. reference to the invasion of Ukraine by Russia. , which has raised CL00 energy prices,
+ 3.12%

NG00,
-2.62%
and food.

“The release of strategic oil reserves is what would be expected and really represents the upper limit of that range,” Brusuelas said. But even this unprecedented launch will not have a “significant impact in the medium and long term on prices,” he added, saying that this is because “the financing of the oil markets is so great compared to the delivery physical supply “.

Related: Biden’s decision to take advantage of oil reserves “like duct tape on a leaking ship,” says analyst

Economists stress that it is primarily the job of the Federal Reserve to fight inflation, and the US central bank, which claims to be independent of the president and Congress, has begun to do just that by raising interest rates.

“The end result is that not much can really be done except for the Fed to start significantly dampening demand,” said Bernard Baumohl, chief global economist at Economic Outlook Group, a non-partisan forecasting firm.

I’ll see: The Federal Reserve will be able to reduce inflation over the next two years, says Bernanke

Also read: Confused about where the Fed’s policy is headed? Professional forecasters are too

The Biden administration “took advantage of the Strategic Oil Reserve, and we still have RB00 petrol prices,
+ 1.69%
at record levels. That in itself should say the limited power the administration has, “Baumohl added.

“Essentially curites”

The Economic Outlook Group expert is baffled about the likely effects of Biden’s moves with E15 petrol, free broadband internet and Obamacare’s “family mistake”.

“These are essentially curitas. You won’t see consumer prices go down in any tangible way, even with these policies being put in place. There are too many other factors right now that make prices as high as now, “Baumohl said, referring to factors such as Russia’s war in Ukraine and a number of supply chain problems caused by the COVID-19 pandemic.

“I’m afraid the tools, the weapons that the administration has are pretty limited.”

Brusuelas of RSM presented a similar view, saying that these efforts have to do with “optics” and help “around the margins.”

“Do you really want to help? Expand the improved children’s tax credit and make it permanent, but that hasn’t happened,” the economist said, referring to monthly payments to families that stopped in December after the Biden’s “Rebuild Better” plan stalled in the Senate.

Brusuelas praised Biden’s housing plan, saying it represents a “good first step” towards a solution to “what will evolve into a housing crisis”. He was also optimistic about measures to increase housing production proposed in a recent Wall Street Journal article by White House National Economic Council director Brian Deese, who wrote the column with the House of Representatives columnist. US trade.

The White House economist responds

When asked by MarketWatch about Biden’s limited ability to cope with inflation, a senior White House economist said the question was whether the Federal Reserve’s job is to ensure price stability and full employment.

“First and foremost, the president and his entire administration respect the independence of the Fed, and they also understand that this is largely their mandate: to address inflation,” said Cecilia Rouse, who chairs the Fed’s advisory board. Biden.

It is important that Congress has been confirming Biden’s candidates for the Fed, “so that the Federal Reserve has all the staff and is ready to take on this challenge,” he added.

“We support the policy changes that are being made to address inflation. That being said, the president is also doing what he can,” Rouse said in a roundtable discussion at the Center for American. Progress, a liberal think tank. He noted measures such as the release of oil reserves and allow the sale of E15 gas in the summer.

Analysts have predicted defeats for the Biden Democratic Party in the November midterm elections if high prices persist.

Republicans are expected to regain control of the U.S. House of Representatives in this election, and the PredictIt betting market offers an 87% chance of that result. The GOP also has a good chance of getting the Senate back 50-50, as PredictIt puts them at 77%.

Democratic lawmakers have joined Biden in working to tackle inflation ahead of the midterm legislature, and the House last week passed a bill aimed at allegedly “raising prices” for petrol bombs.

“We see this as the latest messaging bill designed more to show that Democrats are fighting inflation than to make it a law. The fact that Democrats have a hard time passing even low-impact legislation reflecting current legislation in most states highlights challenges in addressing fuel prices, “said Benjamin Salisbury, research director at Height Capital Markets, in a note.

That follows

Republicans have often criticized Biden for high inflation and complain that the $ 1.9 trillion stimulus package he signed last year has contributed to rising prices, and the minority leader of the Senate, Mitch McConnell, said in a recent speech that he is “directly responsible for as much as 3 percentage points of our current inflation.”

Baumohl, of the Economic Outlook Group, argued that the US bailout plan has probably done more good than harm in helping the US economy recover, and said it would be difficult for Republicans to propose a strategy that would reduce the deficit. inflation quickly.

“They may be willing to further deregulate the XLE energy industry,
+ 1.10%,
He said, “But that’s not going to be the solution, because it will take time, in any case, for refineries to build more refineries, and I don’t think they’re willing to do that because they can see the future and know it.” that renewables and sustainability are the way for many private capital expenditures. “

His company expects inflation to fall by about 4% by the end of the year, with the forecast that there will be no more major outbreaks of COVID in the US and Europe, along with Russian President Vladimir Putin ending his term. war in Ukraine this summer, due to the conflict. toll on Russia’s army and economy.

Baumohl also stressed that the private sector is tackling inflation regardless of what Washington intends.

“Right now, every company in every industry is exploring ways to come up with a new strategy that will help them cope with what appears to be a changing economic and business landscape,” he said.

“There are a lot of things going on in the economy right now to deal with inflation, and for me that’s the real untold story.”

Brusuelas of RSM warned that food prices “will be the real problem by the end of this summer in the autumn, even though maximum inflation is falling”. This is due to sanctions on the big Russians and Moscow’s blockades on Ukrainian wheat crops.

“Patience is what the public will have to have, in terms of waiting for prices to return to the ground,” he said, adding that he sees the Fed returning the U.S. to its long-term 2% target. inflation. the next two or three years.

Another step Biden could take is to reduce Trump-era tariffs on Chinese products. On Monday, he said he was considering the move, as US inflation is at its strongest in 40 years.

US DJIA shares,
+ 1.61%

COMP,
+ 2.68%
have fallen this year, with the S&P 500 SPX,
+ 1.99%
a 15% drop as investors worry about inflation, Fed rate hikes and the potential for a recession.

Now read: Mitt Romney, Elizabeth Warren and other senators send a bipartisan letter to Biden urging him to maintain Trump’s tariffs in China, saying “they are not an engine of current inflation.”

This is an updated version of a report first published on May 24, 2022.



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