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They'll also inherit a situation where homes, cars, food, and
clothing are becoming steadily more expensive, and whether it's
current chair Jerome Powell for a second four-year term or a
promotion for current Fed Governor Lael Brainard, dealing with
that inflation shock carries risks for both the president, the
economy and the Fed.
Rising prices have already begun to sour the public mood,
pushing Biden's approval numbers to the lowest point of his
presidency, cited in polls as a concern that crosses party lines
and income brackets and which is shared even among those for
whom higher prices have been offset by ongoing government
payments.
For the Fed, it has presented an old problem in fresh
circumstances - with tangled global supply chains, a
hard-to-read and potentially diminished U.S. labor market, and
rising prices potentially forcing them to raise interest rates
and slow growth before the economy recovers the jobs and
workforce levels seen before the coronavirus crisis.
It's a choice both Biden and the Fed hoped could be avoided in a
drive to push job growth further and deeper into the economy, on
the expectation inflation would behave roughly the same as it
did before the pandemic. It hasn't.
"Six percent inflation is not the right level of inflation, we
can all agree on that,” said Nela Richardson, chief economist
for payroll processor ADP, citing recent consumer price
increases, at a 30-year high, that have wiped out rising wages
and far outstripped the Fed's 2% target.
The Fed still expects that high pace of price increases to be
"transitory," but "wealthier consumers have the luxury of time,"
Richardson said. "Low-income less-skilled consumers do not. As
much as I understand the transitory argument, waiting it out is
not the best option for some people." Inflation sours sentiment
for U.S. consumers, https://graphics.reuters.com/USA-ELECTION/zdvxonkmbpx/chart.png
'A LOT OF CONTINUITY'
Biden said Tuesday he would make a decision on the Fed in around
four days. Powell's current term ends in February and whether
Biden chooses him or Brainard - both have been interviewed - the
nominee will need to go through a confirmation hearing and vote
in a closely divided Senate.
But a process that began as a somewhat clear-cut choice - stick
with the Republican Powell for continuity and bipartisanship or
tap the Democrat Brainard to reward supporters and pursue a
broader remake of the central bank - has turned trickier.
Both are practiced central bankers who have worked together for
years and shared in remaking Fed policy to put more emphasis on
jobs and allow some higher inflation to do so. Both will have to
wrestle in coming months with the same dilemma of how far to let
those inflation risks run before taking action.
"No matter how this comes out there would be a lot of continuity
in Fed policy. Both of these players have long track records,"
St. Louis Federal Reserve President James Bullard said Tuesday
on Bloomberg Television.
But politically the landscape for Biden has changed from one
where the Fed could keep its prime focus on jobs to one where
the fortunes of the president and his party may need a dose of
inflation fighting as well.
INFLATION A 'VERY BIG CONCERN'
Objectively much is going right. The economy added more than
half a million jobs in October and analysts expect strong
employment growth ahead given the near-record number of openings
reported by firms and the willingness to offer higher wages.
Households are still sitting on large cash balances as a result
of pandemic stimulus programs - and are willing to spend based
on retail sales that continued strong in October. Families with
children are receiving monthly payments that have cut poverty
rates and should, ostensibly, ease the sting of higher food and
gas prices.
Yet Biden seems to have gotten little or no credit for that. In
a recent Reuters/Ipsos poll inflation was cited by strong
majorities of Democrats and Republicans as a "very big concern
for me," an opinion that did not vary by much across education
levels, income or among parents, many of whom receive the
monthly child tax credits.
Republicans have zeroed in on the issue as a potent one for next
year's midterm elections, and some Democratic lawmakers and
economists as well have called on the Fed for tougher action.
The Biden administration, like many at the central bank, also
believes the current run of inflation is a temporary byproduct
of ramping up the global economy after the pandemic.
But a Biden adviser said fears about inflation and the economy
in general were the main reason for Biden’s decline in the polls
in recent months - and that it was incumbent on Democrats to
show they understand the issue and are trying to solve it.
How that plays into the Fed choice remains unclear.
Brainard, at the margin, may be the more "dovish" choice,
willing to show more patience in raising rates. Still, she's
also a Phd economist schooled in the downside of letting
inflation spiral and unlikely to let it happen on her watch.
Powell, a private equity lawyer but convert to the strategy of
pushing broad employment gains, may have an easier road to
confirmation, with announced support already among Senate
Republicans and Democrats.The president himself has begun
putting inflation more center stage.
"Many people remain unsettled about the economy, and we all know
why," Biden said last week. "They see higher prices. They go to
the store...or go online and they can't find what they always
want and when they want it. We're tracking these issues and
trying to figure out how to tackle them head on."
(Reporting by Howard Schneider; Additional reporting by Trevor
Hunnicutt; Editing by Andrea Ricci)
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