Growth, jobs and inflation collide in Biden Fed’s election

The Federal Reserve building is set against a blue sky in Washington, USA, May 1, 2020. REUTERS / Kevin Lamarque / File Photo

WASHINGTON, Nov. 17 (Reuters) – US President Joe Bidens’ nominee as the next Federal Reserve president, expected as early as this week, will inherit an economy heading for the fastest annual growth in a generation of wage increases, that flows to the lowest – paid workers, strong employment and household bank accounts flow with cash.

They will also inherit a situation where homes, cars, food and clothing are steadily becoming more expensive, and whether it is current President Jerome Powell for another four-year term or a promotion for current Fed Governor Lael Brainard dealing with this inflation shock involves risks for both the president, the economy and the Fed.

Rising prices have already begun to degrade the public mood, which pushes Biden’s approval numbers to the lowest point of his presidency, cited in opinion polls as a concern that crosses party lines and income groups and is shared even among those for whom higher prices have been offset by ongoing public payments.

For the Fed, it has presented an old problem in new circumstances – with tangled global supply chains, a hard-to-read and potentially shrinking U.S. labor market and rising prices that potentially force them to raise interest rates and slow growth before the economy recovers job and labor force levels seen before the corona crisis.

It is a choice that both Biden and the Fed hoped could be avoided in an attempt to push job growth further and deeper into the economy, provided that inflation would behave roughly the same as it did before the pandemic. It does not have it.

“Six percent inflation is not the right level of inflation, we can all agree on that,” said Nela Richardson, chief economist for payroll manager ADP, referring to recent consumer price increases, at the highest level in 30 years, which has wiped out rising wages and far surpassed the Fed’s target of 2%.

The Fed still expects the high pace of price increases to be “temporary”, but “wealthy consumers have the luxury of having time,” Richardson said. “Low-income less-skilled consumers do not. As much as I understand the passing argument, it is not the best option for some people to wait it out.”

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‘VERY CONTINUITY’

Biden said Tuesday he would make a decision on the Fed in about four days. Powell’s current term ends in February, and whether Biden chooses him or Brainard – both of whom have been interviewed – the nominee must go through a confirmation hearing and vote in a densely divided Senate.

But a process that began as a somewhat unequivocal choice – sticking to Republican Powell for continuity and bipartisanship or pressing the Democrats’ Brainard to reward supporters and pursue a broader remake of the central bank – has become more difficult.

Both are practicing central bankers who have worked together for years and shared in changing the Fed’s policy to put more emphasis on jobs and allow somewhat higher inflation to do so. Both will have to fight in the coming months with the same dilemma of how far to let these inflation risks run before taking action.

“No matter how this comes out, there would be a lot of continuity in the Fed’s policy. Both of these players have long track records,” said St. Louis Federal Reserve President James Bullard on Tuesday on Bloomberg Television.

But politically, the landscape for Biden has changed from a landscape where the Fed could keep its primary focus on jobs, to a landscape where the fortunes of the president and his party may also need a dose of anti-inflation.

INFLATION A ‘VERY BIG CONCERN’

Objectively goes very 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 companies and the willingness to offer higher wages.

Households are still sitting on large cash holdings as a result of pandemic stimulus programs – and are willing to spend based on retail which continued strongly in October. Families with children receive monthly payments that have lowered the poverty rate and that should apparently ease the sting of higher food and gas prices. Read more

Still, Biden seems to have received little or no credit for it. In a recent Reuters / Ipsos poll, inflation was quoted by a large majority of Democrats and Republicans as a “very big concern for me”, an opinion that did not vary much across education levels, income or among parents, many of whom receive the monthly child tax deduction.

Republicans have focused on the issue as a potent issue for next year’s midterm elections, and some Democratic lawmakers and economists have also called for the Fed to take tougher action.

The Biden administration, like many at the central bank, also believes that current inflation is a temporary by-product of boosting the global economy following the pandemic.

But a Biden adviser said that fears of inflation and the economy in general were the main reason for Biden’s decline in opinion polls in recent months – and that it was the Democrats’ duty to show that they understand the problem and try to solve it.

How it plays into the Fed’s choice is still unclear.

Brainard, in the margin, may be the more “pigeon-like” choice, willing to show more patience in raising prices. Yet she is also a PhD economist trained in the back of letting inflation sprout and hardly let it happen on her watch.

Powell, a private equity lawyer but converting to the strategy of pushing broad employment gains, may have an easier path to confirmation, with announced support already among Senate Republicans and Democrats. The president himself has begun to put inflation more at the center.

“A lot of people are still uncertain 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 not find what they always want and when they want it. We track these issues and try to figure out how to tackle them directly. “

Reporting by Howard Schneider; Additional reporting by Trevor Hunnicutt; Edited by Andrea Ricci

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