All this amounts to a vote of no confidence in the Fed. The American central bank already fell behind the curve once on inflation after it previously misdiagnosed the leap in prices during the pandemic as transitory. Falling behind a second time so soon would make Jerome Powell’s Fed look outright inept. So he now faces a dilemma. Either he sticks to his rate-cut schedule and runs the risk of inflation spinning out of control, or he changes tack, postpones rate cuts and runs the risk of stock markets taking a beating. Neither will leave him popular.

But the man with bigger popularity concerns is Joe Biden. With the election campaign heating up, the President had been hoping to sell the story that inflation is coming back down while the economy remains strong. The economy is still strong, but with inflation going the wrong way, he’ll have to re-work his pitch.

For now, though weakened, his position doesn’t look fatal. The inflation surge of the last two years has left Americans feeling poorer, but Democrats haven’t abandoned him just yet. Meanwhile, assuming the Fed postpones interest rate rises and continues reducing the money supply, price increases will likely still taper off later in the year.

In the meantime, jobs still abound and wages are rising faster than prices, the result being that the pain of inflation is gradually, if very slowly, waning. Reflecting that easing of pressure, recent polls suggest American attitudes to the economy are holding steady. Moreover, they don’t just blame the administration for their inflation woes, they also blame corporations. Biden has been using that to his advantage in targeting corporate greed in his messaging.

Still, his path hasn’t become easier. What would make life very difficult for the President is if inflation continues rising and the Fed is forced to actually increase interest rates. Although not likely, that scenario cannot now be ruled out, not least because the Fed is developing a credibility problem. Because Americans tend to have long-dated mortgages, they aren’t feeling the pain of higher rates in their home payments. However, credit card backlogs signal growing strain in some segments of the electorate, and further increases in their monthly bills would hit Americans just as they’re going to the polls.

Biden thus has to hope that Powell doesn’t botch his task, because his own job prospects could depend on it.

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).

jarapley

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