President Biden and Fed Chair Janet Yellen Downplay U.S. Recession Risk
Former president Trump, President Joe Biden, and Fed Chair Janet Yellen all downplay the US economy’s risk of a recession. Yet some economists aren’t as optimistic. Larry Summers, treasury secretary under President Bill Clinton, said that there was a high risk of a recession once the Fed increased interest rates. Higher borrowing costs are supposed to curb consumer spending and slow business borrowing, which may cause a downturn.
High gas prices
A combination of factors is spurring fears of a U.S. recession, and the sharp rise in gas prices is one of the primary culprits. Analysts, however, believe that the rise in gas prices is not a direct cause of the recession. While higher prices do raise concerns over the economy, higher prices do not necessarily signal a looming recession. The recent spike in gas prices, which has prompted a panicked response from investors, may also be contributing to a recession.
In a recent Wall Street Journal survey, the probability of the US economy entering a recession next year is 44%, up from 18% in January and 28% in April. According to the survey, chief economist at Daiwa Capital Markets America Inc., Michael Moran, the former Federal Reserve chairman, a former economist who predicted the recession, the probability of a recession next year is not likely to remain this high. Moreover, Hochstein said the high gas prices may not persist indefinitely.
While gas prices are likely to drop further this month, economists are watching closely to see what effect higher gas prices will have on consumer sentiment. Higher fuel prices could dampen consumer sentiment, but other factors such as a strong job market and higher wages could cushion the impact of a rising cost of living. So what does all this mean for the US economy? Its high inflation rate will probably continue to rise despite the latest decline in gas prices.
Mismatches between supply and demand
The Fed’s recent decision to raise its key interest rate is raising concerns about the US economy. Although the central bank was established by Congress as an independent agency, its members are appointed by the president. Some economists fear that a higher interest rate will lead consumers to curb their spending and trigger a recession. However, the White House’s director of economic policy, Brian Deese, says the U.S. is uniquely positioned to avoid a recession.
The recent Russian invasion in Ukraine has increased energy prices, making it more expensive to transport goods. Energy-intensive products may also face higher costs as a result. Meanwhile, the conflict in Ukraine has complicated supply chains and increased inflation. Labor supply has improved but labor availability is waning, leaving the US vulnerable to external blows. So, the Biden and Yellen administration is trying to calm fears about a recession.
The Fed has been on the defensive as a result of high inflation. While President Obama suggested that inflation was temporary, President Biden lays the blame for the rising prices on large corporations and meat producers. In fact, the government’s actions are only making the situation worse by increasing inflation. Some economists, especially left-of-center ones, disagree with Biden’s diagnosis.
Oil companies’ profits
President Obama, Vice President Biden, and Federal Reserve Chair Janet Yellen all downplay the threat of a recession. While the White House and Federal Reserve are denying any signs of economic weakness, upcoming data may indicate otherwise. The United States is moving ahead with plans to build a $3.5 billion electric vehicle battery materials plant in Nevada, a move which could make the nation more competitive in an industry dominated by China. Meanwhile, the Federal Reserve has been scrambling to tighten monetary policy in response to inflation, raising its benchmark interest rate by three-quarters of a percentage point this week.
Yellen’s comments were much more supportive of the Biden administration’s economic push, but some investors and economists are warning that a recession is imminent. However, Yellen acknowledged that her forecasts of inflation had been off. Meanwhile, the US unemployment rate remained at 3.6 percent in May. Meanwhile, the Labor Department reported that it added about 390,000 jobs in May. Furthermore, the price of gas is creeping closer to $5 a gallon.
On the other hand, the Biden Administration questions Summers’ figures. Summers cited the Congressional Budget Office’s estimate of the output gap, the difference between actual GDP and the maximum, and argued that the proposed stimulus package would be three times larger than the output shortfall. But a senior White House official pointed out that the government’s estimates of the output gap were based on external sources.
Biden’s stance on inflation
As President Obama’s economic team faces a major headwind in the November midterm elections, Vice President Joe Biden has refocused the nation’s attention on the economy. The vice president has focused on efforts to curb the accelerating cost of living. While Democrats face a tough challenge with rising inflation, the tried-and-true method of cooling price increases will hurt growth and the labor market. On Tuesday, Biden struck a defiant tone in the face of a bleak outlook. He suggested that the administration could take steps to curb price increases without dragging down the labor market or growth.
President Biden’s stance on inflation has a different meaning. President Obama was not in the White House when the latest inflation report was released. While inflation was 9.1 percent higher than a year earlier, Biden said he didn’t want to add to it or give the Republican Party talking points. Nonetheless, two of Biden’s economic brain trust emphasized the role of the Federal Reserve in fighting inflation. Biden’s camp is considering other options for cooling prices, including raising interest rates.
However, the president’s stance on inflation reveals the inconsistency in his message. While White House officials claim there is not much more that Biden can do about rising costs, they have also pointed to the fact that the president doesn’t have much control over the economy. The president may not be in a position to take credit for the positive aspects of the economy, but he is in a difficult position politically.
Federal Reserve Chairman Jerome Powell’s latest comments on the risk of US recession have caused some concern. Powell noted that the labor market is too tight and could lead to a sudden slowdown and recession. As a result, the price level would likely be higher than it otherwise is. But he noted that higher interest rates would not bring down soaring food and gas prices. Instead, they would only increase them further.
Moreover, investors fear that the Fed is putting the country at risk of a recession and are concerned that the central bank may not act fast enough to contain inflation. But the Fed chair said that interest rates are still at an “adequate level.” Nonetheless, he said that it expected to hike rates by three-quarters of a percentage point in the coming year. That could trigger a vicious cycle in which prices increase faster than wages. The Fed chairman also noted that the Biden administration recognizes the political risk of runaway inflation. In fact, a CBS poll showed that Americans are the most pessimistic and optimistic about the economy in his tenure. On top of that, President Biden has called on Congress to suspend the federal gasoline tax for three months in order to cool inflation and prevent a recession.
Jerome Powell said that a soft landing in the US is “not a sure thing,” referring to rising commodity prices and challenges in supply chains. However, it’s still worth noting that senators from both parties are skeptical of Federal Reserve policies. Powell’s congressional testimony will hint at the pressure that lawmakers are exerting on the Fed. As a result, he is expected to discuss a wide range of topics, including the economy’s potential to hit a recession.
Fed Chair Janet Yellen is trying to ease recession fears, despite concerns that the country faces serious headwinds. The war in Ukraine, higher energy prices, and Covid lockdowns in China could all contribute to an economic downturn. The central bank has said that it will be up to policymakers to achieve a “soft landing” by reducing demand and taming price gains. But she added that it’s an art.
As of May 2018, Yellen’s economic forecasts have been mixed. A recent Wall Street Journal survey indicated that the probability of a U.S. recession next year has risen to 44% from 28% in April and 18% in January. Yellen also acknowledged that historically low interest rates have hurt the economy, pointing to emails she received from people who wanted to save for their retirement.
The recent slowdown in the U.S. economy has drawn attention from both politicians and economists. Yellen’s remarks are surprising given that the Federal Reserve Chairman and President Biden have both talked up the economy’s strength and downplayed the risk of a recession. While it is true that the economy is slowing down, she said it is unlikely to be a cause for recession. In contrast, President Biden is placing a higher priority on lowering high inflation and maintaining a strong labor market.