LOS ANGELES.–Hailing the economy as too strong for the Federal Reserve Board to cut interest rates, 81-year-old President Joe Biden plans to use his March 7 State-of-the-Union Speech as proof of economic success. Biden wants to spin the Fed’s reluctance to cut rates as a strong economy, not the ugly reality of inflation preventing the Fed’s Open Market Committee [FOMC] from easing rates. Consumers, especially homebuyers and homeowners hoped that the Fed would start cutting rates to give more affordable borrowing costs over a wide swath of the economy. American Mortgage Bankers Assn. reported that mortgage origination applications were at the lowest level since 1995, creating a slowdown in residential and commercial real estate markets. “I don’t think it’s likely that the committee [FOMC] will reach a level of confidence by the time of the March meeting to identify March as the time to do that,” said Fed Chairman Jerome Powell, expecting not cut soon.
Economists had mixed expectations for the Fed deciding to cut sometime in June, unless the economy continues to overheat, keeping inflation at too high a level to cut rates. Biden has touted the softening of inflation, never saying that the Fed’s tight monetary policy with its 5.5% Federal Funds Rate isn’t likely to drop anytime soon. If Powell decides to cut rates, it’s because economic data shows that the economy is slowing down, possibly heading into stagnant or negative growth. “The economy is not slowing down and some underlying measures of inflation are growing,” said Torsten Slok, chief economist at Apollo Global Management in a note to investors. White House officials like to say the economy is strong but economists see inflationary pressures as the reason why the FOMC cannot not cut rates anytime soon. “We’ll see,” said Richmond Federal Reserve President Tom Barkin, saying inflation remains a problem for cutting rates.
Biden says inflation has come down, not saying that a stubborn inflation has prevented the Fed from loosening its monetary policy to give consumers a break. “I’m still hopeful inflation is going to come down, and if inflation normalizes, then it makes the case for why you want to normalize rates, but to me it starts with inflation,” said Barkin. Biden spent lavishly, three trillion dollars, on pandemic relief, flooding the market with liquidity at a time when he decided to fund a proxy war in Ukraine against the Russian Federation. When Joe announced a Russian Oil embargo May 8, 2022, it sent crude oil prices spiraling in the U.S. and around the globe. Losing Russian oil caused scarcity in world markets, driving the price of crude oil over $100 a barrel. Skyrocketing energy prices started the inflationary momentum that’s still plaguing markets. Powell said the fed has no control of geopolitical events that could keep the Ukraine War going for the foreseeable future.
Biden wants to spin the current economic cycle as a success for consumers, when many Americans live hand-to-mouth, unable to pay inflated prices found in grocery stores and everywhere. Food and energy prices, not typically included in the Consumer Price Index [CPI] are part of the unavoidable burdens for consumers racked by high prices for rent, housing and things like auto, renters and homeowners’ insurance. “Food prices kept going up and that’s a real pain point,” said Robert Frick, corporate economist with Navy Federal Credit Union. White House officials emphasize how strong the economy is without admitting that inflation, caused by excess government spending, made it impossible for the Fed to cut interest rates before the economy slows down. Job creation, touted by the White House, remains a main driver of today’s inflation.
Today’s Artificial Intelligence [AI] frenzy on Wall Street has created what former Fed Chairman Alan Greenspan used to call “irrational exuberance,” also adding to inflated share prices and bloated price-to-earnings ratios, all of which lead to profit-taking, sell-offs and short selling. Economists forecast a jump from 1.5% Gross Domestic Product [GDP] to 2.4% GDP in 2024, ordinarily a good economic sign but, in light of today’s inflation, another sign for the Fed to pause interest rates cuts. Rises in GDP often lead to more inflation, especially with small businesses expecting to raise prices in 2024. “The bottom line is that the Fed will spend most of 2024 fighting inflation,” Slok said. Slok didn’t say whether or not Powell would actually hike the Federal Funds rate in 2024. Most economists hope that the current 5.5% rate will eventually lead to an economic slowdown.
White House officials can’t hide the fact that Biden’s inflation continues to wreak havoc on the economy, causing high energy prices, trickling down to every other service and commodity. Fed Chairman Powell finds himself unable to cut interest rates anytime soon as long that the economy overheats with excessively low unemployment and a rising GDP, now estimated at 2.4% in 2024. Biden won’t admit that the Ukraine War has been a major driver of U.S. and worldwide inflation, now preventing central banks in the U.S., Europe and Asia to slash rates. Powell is expected next week to testify in the House Financial Services Committee and Senate Banking Committee next Wednesday and Thursday. Since there’s no expected pivot on the Ukraine War, Powell has no reason to think that the same inflationary energy pressures won’t continue to fuel inflation in 2024.
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.
