President Biden’s hands-off approach to fighting the highest inflation in four decades poses major risks to the economy and his political fortunes.
Biden made clear earlier this month he will do nothing to push the Federal Reserve away from increasing interest rates as high as possible to curb price growth. But as the Fed picks up the pace of rate hikes, economists fear the bank will be forced to trigger a recession as it struggles to fight supply shocks beyond its control.
“High inflation is a big problem. The Fed showed us again yesterday by raising rates that they are working on getting it down as quickly as possible without causing a recession,” wrote Claudia Sahm, a former Fed research director and author of Stay-At-Home Macro, in a Thursday analysis.
“But that’s a tall order, and its tools cause pain, too.”
The Fed is the federal government’s primary inflation fighter and obligated under federal law to ensure prices stay stable while keeping the job market as strong as possible. The bank’s main weapon against inflation is raising its baseline interest rate range, which increases borrowing costs throughout the economy.
As interest rates rise, households and businesses can afford to spend less on goods and services already in high demand. Higher rates also drag down stock values and home prices, which gives wealthier individuals less room and comfort to spend money.
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