Biden hedges inflation backlash with focus on Fed

President Biden’s relationship with the Federal Reserve has come under the spotlight as the White House touts the central bank’s leadership of the fight against inflation. 

Biden met with Fed Chair Jerome Powell at the White House on Tuesday as the administration touts its efforts to curb rising prices. The meeting came one day after the White House laid out a plan for fighting inflation focused on allowing the Fed to act without interference from the administration.

“My plan … starts with a simple proposition: respect the Fed, respect the Fed’s independence, which I have done and will continue to do,” Biden said in the Oval Office ahead of his meeting with Powell, who was sworn in last week for a second term leading the central bank.

The president added he would give Fed leaders, most of whom he appointed to the bank, ”the space they need to do their job” and “not interfere with their critically important work.”

While Biden did not specifically mention the Fed’s ongoing series of interest rate hikes, the president appeared to send an unmistakable message of support for the central bank’s attempts to slow price growth.

The Fed has already raised its baseline interest rate range by 0.75 percentage points, is on track to hike rates by another 1 percentage point before the end of the summer, and could be forced to go even higher if supply chain issues and the war in Russia add new shocks to the economy.

Experts say that Biden’s emphasis on the Fed’s independence is meant to signal he is serious about fighting inflation even if it means a politically inconvenient slowdown in job gains and economic growth before the midterm elections.

“From the White House’s perspective, I think it’s an all-hands-on-deck situation,” said Derek Tang, co-founder and economist at research firm Monetary Policy Analytics, in a Tuesday interview.

“The Democrats are facing a very precarious situation with the midterms given their poor polling on inflation but also the economy,” he continued. “The general mood is very poor, despite the fact that the economy is quite strong.”

Biden’s approval ratings and consumer confidence have both plunged throughout the year despite a gain of 8.5 million jobs, rapid wage growth and sturdy consumer spending since the president took office.

Republicans have zeroed in on high inflation as they campaign to capture majorities in the House and Senate, giving Democrats little time to make a dent in rising prices.

As the Fed hikes rates and households and businesses face higher borrowing costs, firms may have to charge lower prices for goods and services. But if supply chain issues and other obstacles beyond the Fed’s control keep forcing prices higher, the bank could tip the economy into recession as it raises rates to keep pace.

Biden’s approach distinguishes him from previous presidents, including former President Trump, who pressured the central bank not to hike interest rates for their own political aims.

Former Presidents Lyndon B. Johnson, Richard Nixon and Ronald Reagan all also pushed their respective Fed chairman against raising interest rates during their tenures, laying the groundwork for the inflation crisis of the late 1970s and early 80s.

But by summoning the Fed chair to prove his mettle on inflation, Biden is following in the footsteps of his predecessors with a careful political hedge: using the bully pulpit to boost pressure on the Fed while deflecting political consequences from the White House.

“It’s interdependence. The president and the White House always need someone to blame. The Fed is a natural target for blame,” said Sarah Binder, senior fellow at the Brookings Institution and co-author of “The Myth of Independence: How Congress Governs the Federal Reserve.”

“At the same time, the Fed does need strong political support — probably public support, if not behind the scenes support — to know that they’re going to be supported when they raise rates, because everybody has to believe that the Fed is going to do what it takes.”

Powell has pledged for months the Fed will keep hiking rates until inflation is on its way down toward the bank’s 2 percent annual target, a fight he said could bring “pain” to the U.S. economy.

He has also expressed deep admiration for former Fed Chairman Paul Volcker, who led the bank to induce a recession in the early 1980s to bring inflation under control. Though inflation is lower now and the economy is much stronger than it was before the 1980s shock, Powell has suggested he would lead by his Volcker’s example lest inflation spiral higher.

Biden has sought to embrace the medicine for inflation without the potential side effects, but Fed experts say his attempt to put the central bank in front of the inflation fight may do little to shield him from political consequences.

“While it is intuitively true that the Fed is independent and the president cannot tell it what to do, he is the lead figure for the economy to whom most Americans look,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics. She cited former President Carter losing his 1980 reelection bid to Reagan despite his appointment of Volcker, whose attempts to curb inflation did not prevent Reagan from winning another term in 1984.

Biden has also appointed four of the six members of the Fed board, including his renomination of Powell, elevation of Fed Vice Chair Lael Brainard, and additions of Fed Governors Lisa Cook and Philip Jefferson. 

“They’ll want to call it the Powell Fed, but Republicans will want to call it the Biden Fed,” Binder said.

“It’s a little harder for Biden to blame the Fed if he can be accused of handpicking Fed officials.”