Did Joe Biden signal fiscal policy support for Jerome Powell’s painful monetary policy?

Joe Biden’s victory lap on inflation …

Yesterday, President Joe Biden shared the following comments on the personal consumption index:

“Last month incomes were up and overall prices were down-that’s according to an important measure of inflation; which showed that prices actually came down nationwide last month.  In other words, while the price of some things went up, the price of other things went down by even more.  The American people are starting to get some relief from high prices, and the Inflation Reduction Act that I signed last month will also help bring prices down.

Gas prices decreased every day this summer-the fastest decline in over a decade.  And, today’s report showed that personal income was up last month as well.

We have work to do.  We have to help families who have been squeezed by decades living paycheck to paycheck.  But today confirms that our economic plan is building the economy from the bottom up and the middle out and we are making progress.”

The victory lap runs out of gas …

The President was referring to the Personal Income and Outlays, July 2022 report released yesterday by the U.S. Bureau of Economic Analysis. If we look at just one month of performance, yes, personal incomes did increase between June and July 2022 by .2%.  And yes, prices did fall by .1% over the same period.  But is the President’s political call for a victory lap indication that the US is experiencing economic victory?

The President alluded to falling gas prices during the summer.  That, I admit, caught me a bit off guard as a reason for celebration.  While higher gas prices hurt, they are also an indication of increased economic transactions as people hit the road and spend not only on fuel but other ancillary items like lodging, car rentals, food, etc.

Also, even if we look back to March 2022, data on personal consumption expenditures, prices, and incomes show, in my opinion, moderate volatility or uncertainty on the part of the consumer.  The numbers going back to the spring would support a call for a pending slowdown into the fall and winter.

Jay Powell gets out of the car and helps Biden with a push?

While Mr Biden believes his inflation reduction legislation will bring relief for American households, Jerome Powell, chairman of the Board of Governors of the Federal Reserve System, sees some pain ahead.  Yesterday, Mr Powell made the following comments about the road ahead for households and monetary policy:

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.  These are the unfortunate costs of reducing inflation.  But a failure to restore price stability would mean far greater pain.”

First, this does not sound like the Federal Reserve intends to pivot from its rate hiking path.  Mr Powell is channeling his inner Paul Volcker when stating higher overnight rates on the borrowing and lending of bank reserves will bring down inflation by reducing credit in the financial system.  This tactic was used in the 1970s and the Fed has signaled and Wall Street expects that this play book will be used to the max.

Second, Mr Biden’s watered-down Build Back Better plan may not ramp up in time to spare many Americans the pain of the Federal Reserve’s actions.  Fiscal policy, at least in theory, takes about eighteen months to show any impact much less effectiveness.  As a political move, eighteen months is a century in political terms and an inflation reduction plan that does not show dividends by 2023 will not bode well for Democrats in 2024.

Conclusion: Traders be politically mindful …

For traders, I would expect that increased short term rates will make the dollar more attractive and politically will find Mr Biden having to spin a new and positive narrative around rising rates.

Alton Drew

27 August 2022

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Disclaimer: This blog post should not be construed as legal advice or an agreement to provide legal or political analysis.  To set up a consultation, contact us at altondrew@altondrew.com. Follow me on LinkedIn at www.linkedin.com/in/alton-drew-aa56b31a3.