But with Fed Chairman Jerome H. Powell acting aggressively, the White House now faces the possibility that these efforts will prove too much and instead push the economy into recession. On Thursday, the Bureau of Economic Analysis reported that growth had shrunk for the second consecutive quarter, while business investment and consumer spending fell significantly. Unemployment Claims have risen in recent weeks suggesting new cracks are emerging in the job market, with the latest inflation report this month showing prices rose 9.1 percent in June from a year ago.
The dual threat posed by an economy that is slowing markedly and also grappling with skyrocketing prices has fractured the administration’s allies, with liberal Democrats and centrists increasingly at odds over whether the White House should be alarmed by the administration’s actions. Federal Reserve. Sen. Elizabeth Warren (D-Massachusetts) and many left-leaning economists fear the Fed’s rate hikes could lead to job losses that will reverse gains made under the Biden administration, while others say the White House has to step back as the Fed clamps down. measures to reduce red-hot inflation.
The conflicting impulses reflect a political tie that threatens to undermine Biden’s presidency ahead of the upcoming midterm elections, as the huge voter discontent towers over the economy.
“Economic data is flashing red. We don’t need the Federal Reserve to push the economy into a recession, and the numbers show that it’s a real risk,” Warren said in an interview. “We have never built a strong economy by trying to put more people out of work, and that is exactly what Jerome Powell is trying to do.”
Larry Summers, the former Democratic treasury secretary who has harshly criticized the White House’s stimulus bill last year, responded: “Our problem is not an overly aggressive Federal Reserve; our problem is a Federal Reserve that was too slow to respond to a threat of rising inflation…Many on the far left were the main proponents of the ‘transitional team’ last year, and their views have been proven completely wrong, as the honest have recognized.
As the debate heats up, the White House finds itself in the awkward position of trying to allay fears on both sides by saying Powell can still achieve a “soft landing” that averts a recession while the central bank also cuts inflation. .
On Thursday, Biden repeatedly praised the extent of the job gains and economic growth that have occurred under his administration. Treasury Secretary Janet L. Yellen also stressed to reporters that the decline in gross domestic product this quarter was due to technical factors, such as a decline in business inventories, and that consumer demand remains strong.
“When you look at the economy, job creation continues, household finances remain strong, consumers spend and businesses grow,” Yellen said. Typically, he told her, recessions are characterized by widespread business closings and mass layoffs. “That’s not what we’re looking at right now,” she told reporters.
Citing the strong economic data, Biden also said, “That doesn’t look like a recession to me.”
The comments by Biden and Yellen were part of an all-out push by administration officials this week to dispute GOP claims that the economy is already in a recession, noting that the pronouncement has historically fallen to nonpartisan GOP economists. National Bureau of Economic Research. Many Republicans argued even before the new data came out that two consecutive quarters of economic contraction almost always point to a recession.
The White House strategy could backfire. Attempts by Biden advisers to dismiss inflation as “transient” last year proved unsuccessful, as the administration was forced to abandon that message as prices continued to rise. His attempts to deny a recession could similarly backfire should it materialize later, dwarfing the political advantage of even a groundbreaking climate and energy deal in the Senate.
“They should have learned from their experience with the word ‘transient’ that obsessing too much about labels can lead to poor results. Just because we’re not in a recession today doesn’t mean we won’t be in one in the near future; all signs point to a significant slowdown in the US economy,” said Stephen Miran, who served as a senior Treasury official under President Donald Trump and co-founded Amberwave Partners, an investment fund. “It’s just a matter of time.”
Yellen said the administration focused on addressing the ways Americans were feeling the effects of inflation, not labeling the economy. “We should avoid a semantic battle,” she told reporters.
Still, the Fed’s attempts to solve one economic problem could lead to another. Powell has said the job market is unsustainably tight and the only way to get back on a more stable footing is to cool demand for new hires. the Federal Reserve economic forecasts they also show that the unemployment rate rises a bit as interest rates rise. Summers has even gone so far as to say that the United States needs an unemployment rate of 5 percent for five years to reduce inflation, an analysis Yellen has rejected.
Much of the Fed’s challenge lies in the fact that its main tool is interest rate hikes, which are large and forceful. So far, the Federal Reserve has raised rates back to what is considered “neutral,” with no intention of slowing or boosting the economy.
“Restoring price stability is something we have to do,” Powell said recently. “There’s no option to stop doing that, because that’s what allows you to have a strong job market over time.”
Some liberal economists and Democratic lawmakers question the Fed’s approach. Yellen said Thursday that more than half of inflation is being caused by supply shocks linked to the war in Ukraine, which has pushed up food prices and fuel prices. gas. Liberal lawmakers say reducing demand, the purpose of higher interest rates, will do little to alleviate inflation caused by supply shortages.
The president must sign the Inflation Reduction Law become law and then jump in front of Powell before he drives the recovery off a cliff,” said Lindsay Owens, executive director of the Groundwork Collaborative, a left-leaning think tank.
Other economists disagree, saying inflation remains too high, even excluding volatile commodities.
Inside the White House, many officials are resigned to the reality that there is little they can do about it. Biden has promised to protect the Fed’s independence, in contrast to Trump’s constant attempt to harangue the bank to lower rates. There is little reason to believe that Biden would criticize Powell for raising rates even if layoffs rise.
“Certainly, there are people in the White House who are concerned that the Fed is going overboard, but overall there is a Serenity Prayer quality,” where Biden aides say there is little they can do to alter the trajectory of the Fed, said one outside the White House. adviser, speaking on condition of anonymity to reflect private conversations with administration officials.
Rachel Siegel contributed to this report.