Stubborn inflation has hit Americans at every level: from food prices to housing prices, high costs have taken a heavy toll on consumers. It is therefore not surprising that the Federal Reserve chose to keep rates unchanged after the Federal Open Market Committee (FOMC) meeting that ended on May 1. Additionally, she also left the door open as to when she would start cutting them back. .
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Earlier this year, Fed officials indicated they would implement three rate cuts. However, those officials have since telegraphed that the cuts will likely come later than expected. The Fed now appears to have taken a “wait and see” approach due to both persistent inflation and strong economic data.
“In recent months, there has been a lack of progress toward the 2% inflation goal set by the Committee,” Fed officials said in a May 1 statement.
Indeed, inflation, which was on a downward trajectory, accelerated its pace again, standing at 3.5%, according to the latest consumer price index (CPI) data published on April 10. .
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Inflation and Biden’s quest for re-election
With voters mindful of inflationary pressure, presidential candidates are tackling rising prices as part of their campaigns.
While President Joe Biden has undertaken several efforts to combat inflation — most notably with the Inflation Reduction Act (IRA) of 2022 — some experts have argued that other factors have come into play to make lower inflation, as GOBankingRates previously reported.
And opinions are divided on whether President Biden, if re-elected, would make a difference in reducing prices.
As JT Young wrote in a May 1 opinion piece for The Hill: “Biden doesn’t have months to waste. »
“He has six – in total – before November. While six may be a lifetime in politics, it’s only two quarters in economics. This is the difference between chronological and geological time. Economists can wait; politicians can’t,” Young wrote.
And in terms of voters, half of those surveyed said they expected inflation to rise higher than it currently is, according to a recent Bloomberg News/Morning Consult poll.
Here’s what some economists had to say about the direction of inflation if Biden is re-elected.
Inflation will continue to moderate
Inflation will continue to moderate and return to the Federal Reserve’s inflation target early in Biden’s potential second term, according to Mark Zandi, chief economist at Moody’s Analytics.
“This is due to the easing impact of the pandemic on inflation, tight monetary policy and an easing of the labor market, as well as the normalization of growth in housing costs,” he said. Zandi said.
Zandi added that Biden’s policy efforts are aimed at boosting the supply side of the economy and thus weighing on inflation. He noted, however, that these policies will unfold over the next few years.
Inflation will calm, but rates may not – which will hurt prices
William Luther, director of the Sound Money Project at the American Institute for Economic Research and associate professor of economics at Florida Atlantic University, also argued that inflation would gradually return to the Fed’s 2% target, adding that this will happen “whoever wins in November.” .”
Now, he added, the only question is how high the Fed will need to hold interest rates to keep inflation in line with its 2% target.
“The Biden administration appears determined to run large budget deficits in order to fund housing, family planning, child care, universal pre-kindergarten, family and medical leave, behavioral health care, student debt cancellation, green energy initiatives, union organizing efforts, Social Security administration. investments and a host of other expenditures in its cradle-to-grave welfare system,” Luther said.
In turn, he argued, despite the end of many pandemic-related programs, the federal deficit increased to nearly $1.7 trillion in 2023, up from $1.4 trillion in 2022. The Congressional Budget Office forecasts that deficits will continue to rise in coming years.
“Reasonable people could disagree about whether Biden’s spending plan is appropriate,” he said. “But there is much less scope for disagreement about the effects this will have on long-term interest rates.”
According to him, when the government borrows to finance expenditure, it must withdraw funds from private sector borrowers. This in turn puts upward pressure on interest rates.
“To contain inflation, the Fed will need to target higher interest rates, consistent with additional government borrowing,” he said. “If the Fed does its job, inflation will be low and stable, but Americans will have to bear the cost of rising interest rates.”
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This article originally appeared on GOBankingRates.com: I’m an Economist: Here’s My Inflation Forecast If Biden Wins Again
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