Whether he deserves it or not, President Biden is catching the blame for high inflation that’s wrecking family budgets. Republicans argue that the huge COVID relief bill Biden championed and signed in 2021 flooded too much money into the system, boosting demand and therefore, prices. That’s an exaggeration, but voters won’t parse the details, and they’re poised to pummel Biden’s Democrats in the Nov. 8 midterm elections.
Biden knows inflation is a threat to his presidency. He has released oil from the strategic reserve to bring down gasoline prices, and pursued other measures to lower medication and health care costs. At campaign events, Biden tells voters that other legislation he signed recently will help bring down prices in 2023 and beyond.
One thing Biden never addresses, however, is his own culpability in the Federal Reserve’s delayed effort to raise interest rates and get inflation under control. It’s the Fed’s job to combat inflation, not the president’s, and the Fed did start raising interest rates in March of this year. But that was almost a year after inflation began to rise above normal levels. At the end of 2020, inflation was a negligible 1.3%. By June of 2021, it had hit 5.3%, well above the Fed’s 2% target. Yet the Fed did nothing for another 9 months. Why did it wait so long?
There was fevered debate in the summer of 2021 over whether inflation was transitory or permanent. Biden insisted it was transient, and Fed chair Jerome Powell basically agreed. Financial markets didn’t sniff out stubborn inflation, either, with stocks and other assets vulnerable to inflation soaring to new highs toward the end of 2021, as if everything were fine.
We know now that this view was wrong, and that the Fed should have moved sooner. But amid the second-guessing, one explanation for the Fed’s tardiness has been overlooked. Powell was a Donald Trump appointee whose first term ended in February of 2022. He wanted a second term and was essentially competing for the job as inflation was rising in the middle of 2021. Powell was no shoo-in. Biden reportedly considered Fed governor Lael Brainard for the job, which would have allowed Biden to reshape the central bank and install a head considered by some to be less traditional and more progressive than Powell.
Had Powell started hiking rates in mid-2021, Biden may very well have decided that Powell was too hawkish, and was unnecessarily slowing the economy. That could have tipped the job to Brainard, who's now the Fed's vice chair. So Powell may have had personal reasons to hold off on rate hikes.
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“If Powell had chosen to initiate a cycle of interest-rate hikes, it is entirely possible, indeed likely, that Biden would have replaced him with a different chair, perhaps Lael Brainard,” Harvard economist Kenneth Rogoff wrote recently in Foreign Affairs. “The Fed held back on raising rates, and Biden eventually reappointed Powell. Only then, with Powell comfortably in his new term, did the Fed finally raise interest rates in the spring of 2022.”
What Biden could have done differently, to assure the Fed was free to act, was reappoint Powell sooner. As it was, Biden didn’t announce Powell’s reappointment until Nov. 22, 2021. By then, inflation had hit 6.8%. The Fed normally signals important changes in monetary policy ahead of time, to avoid market shocks. This timing set the stage for the first rate hikes in March of 2022, once Powell was safe in his job and the Fed had made its intentions clear. By then, inflation was at 8.6%.
It's impossible to know what might have been different if Biden had reappointed Powell, say, in June or July of 2021. There's no guarantee the Fed would have started hiking sooner. If it did, however, it could have meant significantly lower inflation by the crucial deadline of Nov. 8, midterm election day. Inflation has dropped from the June peak of 9%, but only to 8.2%. Investors have been hoping for faster progress, one reason for stock market rallies that fizzle as inflation data keeps coming in hotter than expected.
The Fed operates with a lag, and in a few months’ time there might be more progress against inflation, with the year-over-year rate well below 8% and maybe below 7%. How Biden would love to have those numbers today! Back in the middle of 2021, Biden probably didn’t think 8% inflation would knock Congressional Democrats from power. Now, that seems likely. Elections sometimes hinge on decisions not made, and on developments politicians could have foreseen but didn’t.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman
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