Political odds makers don’t see the Democrats faring too well in this November’s midterm elections. With 21 weeks to the elections, Democrats have work to do in convincing the American electorate that their party will be best at governing in a post-pandemic economy.
The doomsayers are out in full force expecting interest rates to climb as the Board of Governors of the Federal Reserve today begins selling off Treasurys and mortgage-backed securities from the portfolio it built up during the pandemic. As securities hit the street, the issue of who wants these securities and at what price, I believe, will be the question in New York and Washington as interest rates are expected to inch up while the prices on these securities due to increased supply goes down.
However, rising rates is what the Board of Governors wants. Higher interest rates are expected to discourage the rise in inflated consumer prices which at the last Bureau of Labor Statistics print is 8.3%, year-over-year. The Board hopes to get this rate closer to two percent per year.
The Board has its work cut out for it in its pursuit of a two percent inflation target. One of the monetary policy tools in its arsenal is the closely watched federal funds rate, the overnight rate that banks charge each other when lending and borrowing excess reserves overnight. Raising the fed funds target rate signals an increase in lending rates which in turn makes doing business more expensive leading to a slow-down in national economic activity.
The current range for this rate is 0.75% to 1.00% with a reported effective fed funds rate of 0.83. On 30 May 2022, Federal Reserve System governor Christopher J. Waller shared in remarks that the he expects the federal funds rate to be around 2.65% by the end of the year.
If the Board of Governor’s monetary policy leads to a contraction in the economy, there is a chance that labor will suffer with the potential loss of jobs. Job losses, while not boding well for most Americans, is particularly harrowing for low-income workers. Inflation and job loss are a double tax on the poor.
As Board of Governors vice-chairman Lael Brainard shared in remarks last April, lower income households spend 77% of their income on necessities, i.e., food, shelter, energy, versus 31% of income spent on necessities by high-income households. Vice-chairman Brainard also noted that the inflation index for low-income households increased faster than the overall consumer price index while the inflation index for higher income households increased at a rate lower than the CPI.
The economic tea leaves should tell President Biden that he will have to come up fast with a sales pitch to low-income voters. His sinking poll numbers mean that he cannot afford to leave any votes on the table. His sales pitch will have to contain a narrative that recognizes the pain in low-income households suffering the double-whammy of higher interest rates and contracting economic growth.
Mr Biden’s package will also have to tackle the apathy, particularly amongst the poor, that their votes don’t matter. The poor are less likely to vote than the affluent. Approximately 48% of households in lowest income category go to the polls versus 86% of families in the highest income categories.
The irony Mr Biden faces in putting together political packages for the poor is that the financing of his proposals will be hamstrung by rising interest rates going into the remainder of 2022. A politically ineffective 2022 will in my opinion seep into 2024.
1 June 2022
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