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Biden searches for inflation solution as voter disapproval grows

Joe Biden is facing a dilemma: on the one hand, he is under pressure to help Americans struggling with rising prices and a slowing economy, but on the other, any unilateral measures he might take risk making the inflation problem even worse.

On Wednesday, the US president is travelling to Cleveland, Ohio, as he refocuses his attention on the economy after his trip to Europe for the G7 and Nato summits and ahead of a planned visit to the Middle East next week.

The journey to the heart of industrial America comes as Biden tries to regain his political footing. His approval ratings have been stuck at the lowest levels of his presidency for weeks, and voters are widely disappointed by his handling of the economy — and the economic picture for the White House has only grown more complicated and difficult in recent weeks.

With inflation still stubbornly high, the Federal Reserve has embarked on an aggressive cycle of interest rate increases, fuelling concerns that the economy may be headed for a significant deceleration or even a recession as consumers cut back on spending and businesses reduce investment.

Meanwhile, with the midterm elections just four months away, Democratic lawmakers are growing increasingly impatient with the persistence of inflation and the financial pain it is causing.

“The Fed is a sledgehammer: stopping the economy from growing or contracting the economy has a hugely negative impact on the working class and the middle class,” said Ro Khanna, a Democratic congressman from California. “We should try everything we can to lower food and gas prices to stave off more draconian action by the Fed.”

Biden has said that addressing inflation is his highest priority given its importance to many voters. The administration has been seeking ways to support households and businesses suffering under elevated costs, including a proposed petrol tax holiday, a possible move to cancel some student loans and the removal of tariffs on some Chinese imports.

But some economists have warned that these measures could be counterproductive. “I think we have to be careful when we think about potential solutions to the problem,” said Gregory Daco, chief economist at EY-Parthenon. The White House does not want to be “potentially adding fuel to the fire by suggesting policies that actually stimulate demand instead of stimulating supply”, he added.

Jean Boivin, head of the BlackRock Investment Institute, said: “I think they might work initially to alleviate some of the pressure but I think they will be storing up more inflation worries down the road.”

The White House’s struggle to come up with a decisive inflation-fighting plan is a result of the fact that its powers to curb prices are limited compared with the Fed’s. Many of the factors driving inflation are also outside of its control, including the war in Ukraine and Opec’s willingness to produce more oil.

The Biden administration’s goal is for the economy to cool enough to bring down costs, though not at the expense of a large chunk of the labour market gains — in terms of jobs and wages — that have occurred since the start of last year.

To some economists, there is not much more that Biden can do to change the dynamic, other than let the effect of last year’s $1.9tn stimulus fade and try to tackle supply-side bottlenecks as aggressively as he can.

“Far and away the most important thing that fiscal policy is doing to dampen inflationary pressures is allowing fiscal support to wane,” said Wendy Edelberg, director of the Hamilton Project, an economic think-tank in Washington. “Anything else that we are going to talk about in terms of what fiscal policymakers can do with respect to inflation is second and third order.”

“Some of the policies the administration has been talking about have an aspect of really increasing demand at a time where we’re trying to rein it in some,” said Claudia Sahm, a former Fed economist. “But they don’t have good tools.”

The White House is hoping that Congress will pass legislation in the coming weeks that will improve voters’ perceptions of its handling of the economy. Lawmakers are debating a bill to fund domestic manufacturing of semiconductors and increase America’s competitiveness with China. While it has bipartisan support, it remains stalled on Capitol Hill after Mitch McConnell, the Republican leader in the Senate, threatened to hold it up.

The White House is also hoping that Democrats will pass a slimmed-down version of Biden’s failed Build Back Better plan. It would include measures aimed at reducing the cost of prescription drugs, which would also help relieve some financial pressure on US households, as well as clean energy tax credits and higher taxes on the wealthy and large corporations.

In California, Khanna would rather see a windfall tax on oil profits than a gas tax holiday, but he said he does support student loan relief and is advocating for more aggressive steps by the White House to boost supply by promoting domestic manufacturing.

It is crucial for the administration and Democrats in Congress to offer answers to voters, he added. “It’s the price of gas, it’s the price of food — we have to be laser-focused on having an initiative on it. When my constituents talk to me that’s central on their minds.”


Source: Economy - ft.com

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