(Headline USA) On the heels of a newly passed $95 billion aid package for Ukraine and other foreign nations, as well as more rounds of controversial student-loan “amnesty” announced by the Biden administration, the root cause of inflation—unfettered federal spending and borrowing—has yet to be addressed in any meaningful way, putting the nation in considerable economic turmoil for the foreseeable future.
But with President Joe Biden and Congress refusing to exercise any constraint of their own, the Federal Reserve has said its economy-crushing guardrails, in the form of burdensome and prohibitively high interest rates, will remain in place to ensure that the problem of currency devaluation does not become even worse than it is already.
The Fed on Wednesday emphasized that inflation has remained stubbornly high in recent months and said it doesn’t plan to cut interest rates until it has “greater confidence” that price increases are slowing sustainably to its 2% target.
The central bank issued its decision in a statement after its latest meeting, at which it kept its key rate at a two-decade high of roughly 5.3%.
Several hotter-than-projected reports on prices and economic growth have recently undercut previous claims that inflation was steadily easing. The combination of high interest rates and persistent inflation has also emerged as a potential threat to Biden’s re-election bid.
“In recent months, inflation has shown a lack of further progress toward our 2% objective,” Fed Chair Jerome Powell said at a news conference. “It is likely that gaining greater confidence will take longer than previously expected.”
Powell did strike a note of optimism about inflation. Despite the recent setbacks, he said, “My expectation is that over the course of this year, we will see inflation move back down.”
Powell’s prediction, of course, hinges significantly on the extrinsic political factors at play. It is widely suspected that even the anticipation of a Trump presidency could provide a much-needed jolt to the economy.
But when it comes to inflationary spending, consumer confidence has little to do with the underlying matter at hand—and indeed, it may be a contributing factor if people are too eager to accept higher prices as the new normal in a free-market system.
Powell’s comments were “a signal that the [Fed] is a lot less confident that they know how policies are going to unfold over the course of this year,” said Jonathan Pingle, an economist at UBS. “We were all sort of hoping for an update on the committee’s path forward. And instead what we got was, ‘We’re really not confident enough to tell you what our path forward is going to be.’ ”
Meanwhile, the stock market was beginning to come to grips with the reality that the Biden economy was going nowhere anytime soon. But with the market facing a recent correction period after its first-quarter boom, some found a measure of solace in Powell’s latest message.
Wall Street traders initially cheered the prospect that the Fed would cut rates at some point this year—as well as his comment that the Fed wasn’t considering reverting to rate increases to attack inflation.
“I think it’s unlikely that the next policy rate move will be a hike,” he said.
Later, though, stock prices erased their gains and finished the day essentially unchanged from where they were before Powell’s news conference.
Still, Powell sketched out a series of potential scenarios for the months ahead. He said that if hiring stayed strong and “inflation is moving sideways,” that “would be a case in which it would be appropriate to hold off on rate cuts.”
But if inflation continued to cool—or if unemployment rose unexpectedly—Powell said the Fed would likely be able to reduce its benchmark rate.
The unemployment factor is one that is within the Biden administration’s power to control. Thus far, it has benefited from artificially high employment numbers throughout the Democrat leader’s presidency—a factor that came as no surprise during the COVID pandemic recovery but has proven a conundrum to some in its aftermath.
The unemployment rate has remained below 4% for more than two years, the longest such streak since the 1960s. However, the job increases have been largely limited to only a handful of sectors, including government hires and the government-subsidized healthcare industry.
Hospitality (i.e. restaurant work) and construction have also seen some growth, likely due to the uptick in illegal immigration, which has brought in cheap labor willing to undercut the wage demands of American workers—while also receiving generous subsidies from the U.S. government.
Thus, Biden has essentially been spending taxpayers’ money to keep the unemployment rate low—a perverse distortion of its usual measure as a reflection of economic health and correlation with the gross domestic product.
Were Biden to begin enforcing border security or, alternatively, limit government spending on illegals, the short-term effect of that might be a more realistic reflection of the unemployment figure, but it could potentially help spur the desired rate cuts.
Those cuts would, over time, bring down the cost of mortgages, auto loans and other consumer and business borrowing.
The central bank’s overarching message Wednesday—that more evidence is needed that inflation is slowing to the Fed’s target level before the policymakers would begin cutting rates—reflected an abrupt shift. As recently as their last meeting on March 20, the officials had projected three rate reductions in 2024, likely starting in June.
But given the persistence of elevated inflation, financial markets now expect just one rate cut this year, in November, according to futures prices tracked by CME FedWatch.
The Fed’s warier outlook stems from three months of data that pointed to chronic inflation pressures and robust consumer spending. Inflation has cooled from a peak of 7.1%—according to the Fed’s preferred measure, although consumer prices have risen in many areas by more than 50% and have stubbornly refused to come back down.
Average prices remain well above their pre-pandemic levels, and the costs of services ranging from apartment rents and health care to restaurant meals and auto insurance continue to surge. With the presidential election six months away, many Americans have expressed discontent with the economy, notably over the pace of price increases.
Although still nowhere near the near-zero level it was when Biden assumed office, the rate of increase has now slowed to 2.7%, and the cost of some goods has actually returned to normal as supply chains have reopened.
However, concerns are growing over energy production—another Biden policy foible that may potentially skyrocket in coming months and increase production and distribution costs across the board.
While economic growth reached just a 1.6% annual pace in the first three months of this year, consumer spending grew at a robust pace, likely due to the elevated costs of everyday necessities.
Yet, Powell downplayed any concerns that the Bidenflationary economy might be at risk of sliding into “stagflation”—a toxic combination of weak growth, high unemployment and elevated inflation that afflicted the United States during the 1970s.
“I was around for stagflation, and it was 10% unemployment, it was high-single-digit inflation and very slow growth,” Powell said, neglecting to mention that the Fed has since changed its way of measuring inflation to make the current metric seem less severe.
“Right now, we have 3% growth—which is pretty solid growth, I would say, by any measure,” he continued. “And we have inflation running under 3%. … I don’t see the ‘stag’ or the ‘flation,’ actually.”
On Wednesday, the Fed announced that it would slow the pace at which it’s unwinding one of its biggest COVID-era policies: Its purchase of several trillion dollars in Treasury securities and mortgage-backed bonds, an effort to stabilize financial markets and keep longer-term rates low.
The Fed is now allowing $95 billion of those securities to mature each month, without replacing them. Its holdings have fallen to about $7.4 trillion, down from $8.9 trillion in June 2022, when it began reducing them. On Wednesday, the Fed said it would, in June, reduce its holdings at a slower pace.
Instead of allowing $60 billion in Treasuries to roll off each month, it will allow just $25 billion. At the same time, it will continue letting $35 billion in mortgage-backed bonds mature each month.
By cutting back its holdings, the Fed could contribute to keeping longer-term rates, including mortgage rates, higher than they would be otherwise. That’s because as it reduces its bond holdings, other buyers will have to buy the securities instead, and rates might have to rise to attract the needed buyers.
Adapted from reporting by the Associated Press
