Joe Biden has reiterated his support for the Federal Reserve’s efforts to combat inflation, giving the green light for the US central bank to continue raising interest rates without a political backlash.
The president on Tuesday said fighting inflation was his administration’s “top economic challenge”, as polls suggest his party will be punished for spiralling prices at this year’s midterm elections.
Biden promised the White House would take action to bring down costs, but also emphasised the Fed’s “primary role” in tackling inflation, in a signal that the administration is more concerned about high prices than a possible recession triggered by rapid rate rises.
He said: “There are things we can do and we can address. That starts with the Federal Reserve, which plays a primary role in fighting inflation.”
The president added: “While I will never interfere with the Fed’s judgments and sit here and tell them what to do — they’re independent — I believe that inflation is our top economic challenge right now, and I think they do too.
“I agree with what chairman [Jay] Powell said last week, that the number one threat [to] the strength that we build is inflation. So the Fed should do its job and it will do its job. I’m convinced of that.”
The remarks underscore the growing concern within the Biden administration about inflation, which has continued to rise even as the Fed has begun raising rates.
The Fed raised its benchmark policy rate from near-zero levels to a new target range of 0.75 per cent to 1 per cent, having delivered its first half-point rate rise since 2000 last week. The central bank is poised to repeat the move at its meetings in June and July, with elevated odds of a similar adjustment in September.
Despite this, prices continue to rise, with one measure of core inflation that strips out volatile items such as food and energy hovering at 5.2 per cent.
As a result, many economists worry the Fed could go too far, raising rates so quickly that it could trigger an economic contraction and job losses.
“It’s unlikely the Fed is going to be able to manage that to a soft landing,” said Randal Quarles, a former top official who departed the central bank late last year, in a recent public appearance. “The effect is likely to be a recession.”
This argument was rebuffed on Tuesday, however, by John Williams, the president of the New York Fed, who predicted the economy would show continued “strength and resilience” despite far tighter monetary policy.
In a speech delivered on Tuesday, Williams acknowledged the central bank’s task to “turn down the heat” on a red-hot economy without undue hardship would be difficult, but said it was “not insurmountable”.
“Our monetary policy tools are especially powerful in the very sectors where we see the greatest imbalances and signs of overheating — such as durable goods and housing,” he said.
“Higher interest rates will cool demand in these rate-sensitive sectors to levels better aligned with supply. This will also turn down the heat in the labour market, reducing the imbalance between job openings and available labour supply.”
The message from Williams — a close confidant of Powell and a voting member of the Fed’s monetary policy setting committee — was delivered at a tumultuous time for financial markets, which have whipsawed violently in recent days as investors prepare for an end to the pandemic-era stimulus measures that central banks worldwide have had in place for the past two years.
US borrowing costs are also sharply higher, led by a jump in the 10-year Treasury yield, a benchmark that underpins borrowing costs and equity valuations worldwide. It now trades at about 3 per cent, up 1 percentage point since March.
Traders broadly expect the federal funds rate to reach 2.7 per cent by the end of the year, a level economists project will begin to crimp economic activity, especially as the Fed’s planned reduction of its $9tn balance sheet gets under way next month.
Williams on Tuesday instead boasted of an “advantage” the central bank has this time around, as he built the case for why he expects core inflation to descend to nearly 4 per cent this year and 2.5 per cent next year without a significant deterioration in the unemployment rate and economic growth.
Powell last week predicted a “soft or softish landing”, with higher interest rates potentially causing fewer job openings rather than outright losses. Chris Waller, a Fed governor, on Tuesday shared in that optimism, suggesting the central bank can raise rates without a big adverse shock to the jobs market.