With the US approaching midterm election season, much of the political debate has centered around strong economic growth and strong employment versus the detrimental effect of inflation.
The Wall Street Journal says that the efforts of the Federal Reserve (the US central bank) to slow inflation increases the possibility of high unemployment, slowing economic growth and recession, which could create a “new headache” for the Biden administration, according to the newspaper.
Biden and his advisers are already trying to tackle inflation, which is heading towards its highest level in four decades.
Republicans blame the administration for higher prices, saying it stoked inflation with pandemic stimulus packages and then failed to counteract it with soaring prices.
This fall’s midterm elections will determine the majority in Congress.
“It is this president and his entire Democratic government who have drained the pockets of American families, and every poll shows that our citizens understand this sad reality very well,” Senate Minority Leader Mitch McConnell said.
Biden and his economic team stressed that the economy is in a good position to withstand the challenges, pointing to factors such as a strong labor market and unemployment, which is close to its lowest level in 50 years.
“Our economy is in transition from what has been the strongest recovery in recent American history to what may be a period of more stable and resilient growth that works best for families,” said Brian Dees, director of the National Economic Council’s State of the Union program on CNN.
The administration says Republicans will do little to combat inflation and will seek to raise taxes on American families.
The newspaper quoted Jared Bernstein, a member of the US House of Councilors in the White House, as saying that the current economy “has some real headwinds, but American families face those headwinds from a position of strength,” referring to the relatively high wages and low unemployment rates.
The newspaper says that changing the direction of the economy is within the control of the administration is only partially, with the most powerful tools held by the Federal Reserve.
The central bank is struggling to tame inflation without significantly slowing the labor market and the broader economy, a feat that some economists say may be difficult to achieve.
Federal Reserve Chairman Jerome Powell told the Wall Street Journal last week that there “could be some pain” in lowering inflation and that unemployment could rise a bit.
Last Wednesday, Treasury Secretary Janet Yellen said the outlook for the global economy was challenging and that rising food and energy prices were “having stagflationary effects,” referring to a combination of high inflation and weak growth.
Inflation presents a bewildering challenge, both for the administration and the Fed. Consumer prices rose 8.3 percent in April from a year earlier, which means Americans of all stripes are paying more for gasoline, groceries and travel, even if they feel secure in their jobs.
What’s more, the economy, which has been expanding rapidly since early 2020, showed some signs of slowing, as it contracted in the first quarter.
Larry Summers, the Clinton administration’s Treasury secretary, told the newspaper earlier this month that he believed a recession in the next two years was more likely than not, adding, “I think the stakes are very high.”
Biden has continued to push for the next stage of his economic agenda, calling for higher taxes on wealthy and partly large corporations to help fund investments in social programs that the administration says will help lower everyday costs for families.
Biden has been unable to secure congressional approval for this agenda amid concerns from Republicans and even some Democrats, who say more spending will fuel more inflation.
Josh Bivens, director of research at the Economic Policy Institute, a left-wing think tank, said Biden’s proposed economic policies would help prepare the economy for any eventual recession.
Bevins said he believes the most likely scenario is a so-called soft landing, in which the Fed cuts inflation without causing a significant slowdown in the labor market.
For example, higher interest rates as a result of the Fed’s actions would make car and home loans more expensive.