White House insists economy is strong as allies worry about Fed
But with Fed Chairman Jerome H. Powell acting aggressively, the White House now faces the prospect that those efforts will prove too much and instead tip the economy into a recession. On Thursday, the Bureau of Economic Analysis said growth contracted for a second consecutive quarter, while business investment and consumer spending fell sharply. Unemployment claims have risen in recent weeks, suggesting new cracks are emerging in the labor market, and the latest inflation report this month showed prices rose 9.1% in June from compared to last year.
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The dual threat posed by a dramatically slowing economy that is also grappling with exorbitant prices has fractured the administration’s allies, with liberal and centrist Democrats increasingly at odds over whether the White House should be alarmed by the actions of the Federal Reserve. Sen. Elizabeth Warren (D-Mass.) and many left-leaning economists fear Fed rate hikes will lead to job losses that reverse gains made under the Biden administration, while others say that the White House needs to step back as the Fed takes drastic action. measures to reduce galloping inflation.
The conflicting impulses reflect a political connection that threatens to undermine Biden’s presidency ahead of the upcoming midterm elections, as huge voter discontent mounts over the economy.
“Economic data is flashing red. We don’t need the Fed to tip the economy into a recession, and the numbers show that’s a real risk,” Warren said in an interview. “We’ve never built a strong economy by trying to put more people out of work, and that’s exactly what Jerome Powell is trying to do.”
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Larry Summers, the former Democratic Treasury secretary who strongly criticized the stimulus bill the White House pushed through last year, countered: “Our problem isn’t an overly aggressive Fed; our problem is a Fed that has been far too slow to react to a growing inflation threat… Many on the far left were leading advocates of the “team transition” last year, and their views have proven to be totally incorrect, as honest people have admitted.
As the debate heats up, the White House is in the awkward position of trying to allay fears on both sides by saying Powell can still pull off a ‘soft landing’ that averts a recession while the central bank cuts also inflation.
On Thursday, Biden repeatedly touted the magnitude of the job gains and economic growth that have occurred under his administration. Treasury Secretary Janet L. Yellen also told reporters that the decline in gross domestic product this quarter was due to technical factors, such as a drop in business inventories, and that consumer demand remains strong.
“When you look at the economy, job creation continues, household finances remain strong, consumers are spending and businesses are growing,” Yellen said. Typically, she said, recessions are characterized by broad business closures and mass layoffs. “That’s not what we’re seeing right now,” she told reporters.
Citing the strong economic data, Biden also said, “It doesn’t look like a recession to me.”
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Biden and Yellen’s comments were part of an all-out push by administration officials this week to challenge GOP claims that the economy is already in recession, noting that the statement has historically fallen to nonpartisan National economists. Bureau of Economic Research. Many Republicans have argued even before the new data came out that two straight quarters of economic contraction almost always point to a recession.
The White House’s strategy could backfire. Already, attempts by Biden advisers to label inflation as “transitional” last year have proven a failure, as the administration was forced to abandon that message as prices continued to rise. Their attempts to deny a recession could similarly backfire if they materialize later, even eclipsing the political benefits of a groundbreaking climate and energy deal in the Senate.
“They should have learned from their experience with the word ‘transitional’ that clinging too much to labels can lead to poor outcomes. Just because we’re not in a recession today doesn’t mean we won’t be. not in the near future – all signs point to a significant downturn in the US economy,” said Stephen Miran, who served as a senior Treasury Department official under President Donald Trump and is the co-founder of Amberwave Partners. , an investment fund. “It’s just a matter of time.”
Yellen said the administration is focused on how Americans are feeling the effects of inflation, not labeling the economy. “We should avoid a semantic battle,” she told reporters.
Yet the Fed’s attempts to fix one economic problem could lead to another. Powell said the labor market is unsustainably tight and the only way to put it back on more stable footing is to cool demand for new hires. The Fed’s economic forecast also shows the unemployment rate rising a little as interest rates rise. Summers went so far as to say that the United States needs a 5% unemployment rate over five years to reduce inflation, an analysis which Yellen rejected.
Much of the Fed’s challenge is that its primary tool is interest rate hikes, which are broad-based and sharp. So far, the Fed has cut rates to what is considered “neutral” – not intended to slow or stimulate the economy.
“Restoring price stability is just something we need to do,” Powell said recently. “There’s no option not to because that’s what allows you to have a strong job market over time.”
Some liberal economists and Democratic lawmakers question the Fed’s approach. Yellen said Thursday that more than half of the inflation was caused by war-related supply shocks in Ukraine, which pushed up the price of food and fuel. Liberal lawmakers say reducing demand — the goal of higher interest rates — will do little to ease the inflation caused by supply shortages.
“The president should enact the Cut Inflation Act and then jump past Powell before he rocks the recovery,” said Lindsay Owens, executive director of Groundwork Collaborative, a left-leaning think tank.
Other economists disagree, saying inflation is still far too high, even excluding volatile commodities.
Inside the White House, many officials are resigned to the reality that there may be nothing they can do about it. Biden has vowed to protect the independence of the Fed, in contrast to Trump’s constant attempt to harangue the bank into lowering rates. There is little reason to believe Biden would criticize Powell for raising rates even if layoffs resume.
“Granted, there are people in the White House who are worried about the Fed going overboard, but in general there’s a serenity prayer quality,” where Biden aides say they can’t do much. something to alter the course of the Fed, said a White House outsider. adviser, speaking on condition of anonymity to reflect private conversations with administration officials.
Rachel Siegel contributed to this report.