Federal Reserve Board Chairman Jeorme Powell, 70, sees economic storm clouds on the horizon, raising interest rates to battle the worst inflationary spiral seen in the United States in over 40 years. Powell can’t give markets any assurance that he won’t stop raising the Federal Funds Rate currently at 5.5%, driving the prime rate to 8.5%, pushing mortgage rates to too nearly 8%. Powell doesn’t see the so-called soft landing where the Fed can gradually start reducing interest rates to boost the stagnant U.S. economy with 2023 Gross Domestic Product [GDP] rising only 1.6%. President Joe Biden, 80, was warned about passing too much pandemic relief, culminating in trillion dollar-plus infrastructure bill, passed by the U.S. Senate Nov. 6, 2021. Economists warned about Biden’s government spending fueling inflation. Then came the Feb. 24, 2022 Ukraine War, sending inflation into the stratosphere.
Biden claims he had nothing to do with the latest bout of inflation making it more difficult for ordinary Americans to spend into the consumer economy. Powell refuses to call the current economic trend as a soft-landing because he doesn’t know how many more rate hikes are needed to tame the inflationary monster. No economist wants to see a repeat of the inflation seen in the late 1970s, early 1980s, when stagflation, a term referring to slow growth and high inflation struck the U.S. economy. Back then, the prime rate hit 21%, currently standing at 8.5%. Where interest rates go from here is anyone’s guess, including Powell, who takes it day-by-day reading reams to statistics trying to make sense of the economy. “No, I would not do that,” Powell said, referring to prospects of a soft-landing, surviving current economic times without driving the economy into recession.
Growing signs point to problems for the U.S. economy going forward with Biden showing no signs that he’s willing to compromise with Republicans on Ukraine spending. Unwilling to negotiate with Congressional Republicans, Biden demanded $24.3 billion in additional Pentagon spending for the Kiev government. Biden looks willing to shut down the government to keep Ukraine war spending intact. Biden’s big pandemic relief and infrastructure spending started the spike in inflation, leading to the 2022 Russian oil embargo. Boycotting Russian oil created a worldwide oil shock that drove oil prices to nearly 100 a barrel, fueling price spikes around the globe. Only the White House denies its role in fueling the inflation, prompting the Fed to take aggressive action hiking interest rates 11 times in the last year. Whether Powell is forced to hike again in 2023 is anyone’s guess.
Ending the Ukraine War could help clear some of the storm clouds gathering over the economy. Biden has committed himself to toppling the Russian Federation, one of the worst foreign policy blunders in U.S. history. Whatever prompted Russian President Vladimir Putin to invade Ukraine Feb. 24, 2022, Biden should be working feverishly to end the war, not continue to supply Ukraine billions in U.S. weapons with the intent of degrading the Russian military. Ending the war would help lower inflation, restoring global oil markets back to more predictable pricing. If Biden is willing to shut down the U.S. government over Ukraine, what’s he willing to do to the economy? Powell has said the one thing the Fed has no control over are geopolitical events like the Ukraine War. Only Biden, working with Congress, can stop the reckless Ukraine War spending, damaging the U.S. economy.
Powell pointed out the all the pandemic relief and infrastructure spending has added to the $33 trillion national debt and $1.6 billion federal budget deficit. Wells Fargo senior economist Mike Pugliese said the shutdown could harm the economy. “And with the U.S. economy facing rising interest rates, high oil prices, and striking unions, he warned the impact could be severe. So, with Republicans ask Biden, House and Senate Democrats to show fiscal restraint in the new budget, there are good reasons. Powell can’t control runaway oil prices approaching 100 a barrel. If Biden were to end the Ukraine War, reinstate workable diplomatic relations with Russia and reverse the Russian oil embargo, it could help stop inflation. Today’s United Autoworkers [UAW] strike adds to economic uncertainty, certainly slowing the auto industry at a time of economic uncertainty.
Shutting down the U.S. government over failing to negotiate a reasonable budget could worsen U.S. economic outlook at time of economic uncertainty. “The prospect of a prolonged strike combined with a federal shutdown is the greatest threat to the American economy, future job growth, and our state’s fiscal health, if a deal is not made soon,” said Zack Pohi, chief of staff of Gov. Gretchen Whitmer (D-Mich.). When 44-million student loan borrowers are forced to resume payments Oct. 1, it’s going to further slow consumer spending leading to a drop in 2023-2024 GDP. Democrats and Republicans should stop playing a dangerous game of chicken with the U.S. economy and strike a deal to keep the government running. Mortgage interest are near 8%, already slowing the all-important housing industry. If Congress fails to act soon, a government shutdown could send the economy into recession.
About the Author
John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He’s editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.
