And here’s the news in the US for Tuesday afternoon: The president is scheduled to meet with the central bank governor in the presence of the finance minister. The Governor (for his second term. His original appointment came from the previous president).
Well, this is America. The American Constitution separates religion and state (roughly). It separates even more decisively between the executive branch and the central bank, the Federal Reserve. The president is not authorized to give instructions to the Fed, and from time to time a debate erupts as to whether it is appropriate for the president to disagree with the bank publicly. Donald Trump may have threatened to fire the governor, but it is doubtful that this could have happened even in the days of Trump.
● President of the United States in a special article for the Wall Street Journal: “This is my plan to fight inflation”
● Citi’s chief strategist has a theory that explains everything that happens in the markets
The US Treasury Secretary admits he made a mistake in estimating the intensity of inflation
The last meeting of the President and the Governor was seven months ago. Since then they have not spoken, maybe not even on the phone.
Their meeting on Tuesday therefore had a dramatic dimension. It was intended to underscore the magnitude of the president’s interest in America’s most serious economic problem, which is also his most serious political problem, five months before the midterm congressional elections. A ruling party always loses seats in the middle of a term, but this time it is a candidate for a victorious defeat. Inflation is the main reason. In the 12 months to April, it stood at 8.26%.
“My predecessor tried to discredit”
And though the President summoned the Governor to a six-eye conversation, he was very careful not to give the impression of intervention. He preceded the meeting with an article in the Wall Street Journal, in which he wrote that “the Federal Reserve has the primary responsibility for dealing with inflation.” This was not a mandatory exit. Biden meant it.
He wrote, “My predecessor [דונלד טראמפ] He used to discredit the Fed. In the past, during inflation, presidents have tried to influence the Fed’s decisions inappropriately. I will not do that. I appointed remarkably skilled people, from both political parties, to lead this institution. I agree with their assessment that inflation is now our top economic task. “
The president is doing something that none of his predecessors did: he not only trusts the independence of the central bank, as required by law, but he goes much further: he encourages the central bank to get its hands on economic activity, in order to lower inflation.
He knows what all his predecessors knew: the war on inflation often involves side effects. Inflation in the late 1970s was exterminated by then-Governor Paul Walker through unprecedented rate hikes, which stifled economic activity and dragged the economy into the worst recession since World War II.
The traditional economy is back
The Federal Reserve was founded in 1913. Presidents have since faced some degree of friction or frontal confrontation with the governors. Since the 1960s, this conflict has begun to become public. Presidents have blamed governors for their political difficulties – or succeeded in persuading them to cooperate with them.
Bill Clinton based the tides of the 1990s on an understanding between him and longtime Governor Alan Greenspan: he raised taxes as soon as he entered the White House, and reduced expenses. In return, Greenspan gradually lowered interest rates. The result was several years of a surplus in the national budget, and in any case of low interest rates. It was a rare time, of full employment and low inflation.
In those years, the assumption spread, even among economists, that perhaps advances in computing and artificial intelligence solved once and for all the paradoxes of the traditional economy, freeing us from the punishment of the Phillips curve on the relationship between employment and prices. Very many believed that from now on the Governors of the Central Bank would no longer have to “snatch the punch bowl in the middle of the party,” and all the tides would end in a “soft landing.”
Since then, the traditional economy has been knocking on the doors again, although only human catastrophe (sub-prime crisis) and catastrophic Chinese bats (corona) have been able to bring about a recession. But the search for a “soft landing” did not stop. Governors are required by law not only to fight inflation, but also to ensure full employment. Since no one is able to “guarantee” employment, this formula is seen as an invitation to strive for a soft landing instead of a crash.
In the past, presidents during economic crises have prayed for low interest rates. Two lost their presidencies after a single term (Carter in 1980; Bush Sr. in 1992) largely because of the high interest rates that the recession brought. Biden is confident that there will be no recession, because unlike those two times the economy is strong, consumption is massive, growth is solid, and Americans’ confidence in their financial situation is higher than it has been for ten years. So why would there be a recession if the central bank tightens its belt a bit?
The “inflation plan” that Biden announced on Tuesday includes legislation. But there is no chance that something like this will happen in the next five months before the election. Congress is halved irreparably.
There is a clear link between inflation and the Russian war in Ukraine. But subscribe and finish with Biden not to let go of the pressure on Vladimir Putin. This pressure is charging a heavy long-term price from Russia (“our infrastructure is broken,” the Russian transport minister announced last week), but it is charging a heavy short-term price from Western allies. The European Union’s decision on Tuesday to bring an end to oil imports from Russia through tankers (it will continue to flow in pipelines) immediately led to an increase in oil prices in world markets, which is surely a hint to come.
“There is no historical example”
The minutes of the bank’s management meetings show intent for three consecutive monthly interest rate hikes, between May and July. Last month the interest rate rose by half a percent. It seems that the next two will stand a similar rate. If that does not help, the uploads will continue. On the eve of the corona crisis the interest rate was actually zero. In 2024, which is the year of the presidential election, it is possible that the interest rate will already be 4%.
Governor Powell has finished saying the burden is heavy. “It may involve some pain,” he said in mid-May. “Pain” in this context is of course the labor market. “It may not be a perfect market,” he said in an impressive demonstration to say the least.
Employment is at an all-time high: unemployment is only 3.6%. In other words, it is possible to seemingly lose jobs without getting caught up in the spin that economists call deflationary, in which inflation feeds a recession and returns, God forbid.
But less optimistic is one of the consistent critics of the Biden economy and the central bank. Professor Larry Summers of Harvard University, a former finance minister and senior adviser to the presidents, said on Tuesday that “we need to understand that a soft landing is going to be very difficult under the circumstances.” He finds it difficult to see a decline in inflation without a “substantial decline in wage inflation,” and this can only happen if there is a significant rise in unemployment.
“There is no historical example where inflation has actually dropped without a real economic weakening,” Summers told the Washington Post podcast (read the transcript at https://tinyurl.com/summers-wp). Not exactly willow music to the president’s ears.
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