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Home / Economy / Rising risk of recession creates new headache for Biden

Rising risk of recession creates new headache for Biden

US President Joe Biden.

  • The White House is deploying a strategy to highlight economic bright spots as the Fed tackles inflation

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The Federal Reserve’s efforts to slow inflation are raising the possibility of higher unemployment, a slower-growing economy and a recession, prospects that could create new headaches for the Biden administration.

The Federal Reserve’s efforts to slow inflation are raising the possibility of higher unemployment, a slower-growing economy and a recession, prospects that could create new headaches for the Biden administration.

As the country heads into midterm-election season, much of the political discussion has centered around solid economic growth and robust employment versus the damaging impact of inflation. More recently, warnings about the prospect of an economic downturn—which could come in 2023 according to some estimates—have complicated the economic picture in a new way.

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As the country heads into midterm-election season, much of the political discussion has centered around solid economic growth and robust employment versus the damaging impact of inflation. More recently, warnings about the prospect of an economic downturn—which could come in 2023 according to some estimates—have complicated the economic picture in a new way.

Mr. Biden and his advisers are already grappling with inflation trending near a four-decade high, wavering consumer confidence and headwinds posed by Russia’s war in Ukraine. Republicans lay blame for surging prices on the administration, saying it stoked inflation with pandemic-related stimulus then failed to counter it as prices rose. They have lambasted Mr. Biden and Democratic lawmakers ahead of this fall’s midterm elections that will decide which party controls Congress.

“It is this president and his all-Democratic government who have drained American families’ pocketbooks, and every poll shows our citizens understand that sad reality all too well," Senate Minority Leader Mitch McConnell (R., Ky.) recently said on the Senate floor.

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Mr. Biden and his economic team have maintained the economy is well-positioned to withstand challenges, pointing to factors such as a strong labor market and unemployment trending near a 50-year low. They are deploying a strategy seeking to improve Americans’ view of the economy, which could bolster confidence and help underpin consumer spending.

The strategy includes Mr. Biden increasing travel domestically to tout economic bright spots and the administration’s efforts to lower consumer prices. He is also drawing a starker contrast between his economic-policy agenda and that of Republicans, who the administration says would do little to combat inflation and seek to raise taxes on American families.

“It’s an economy with some real headwinds, but American households are facing those headwinds from a position of strength," said Jared Bernstein, a member of the White House’s Council of Economic Advisers. “There are a number of important economic indicators that underscore that position of strength."

The White House faces two hurdles. Economic concerns rate highly among voters, so messages about the strength of the economy risk falling flat. And changing the direction of the economy is only partly within the administration’s control, with the strongest levers held by the Fed. The central bank is mounting an aggressive effort to tame inflation without substantially slowing the labor market and the broader economy, a feat some economists say may be difficult to accomplish.

Federal Reserve Chairman Jerome Powelltold The Wall Street Journal last week that “there could be some pain involved" in bringing down inflation and that unemployment might rise slightly. Treasury Secretary Janet Yellen last Wednesday said the outlook for the global economy is challenging and that higher food and energy prices are “having stagflationary effects," referring to a combination of high inflation and weak growth. U.S. stocks tumbled sharply last week.

Matthew Luzzetti, chief U.S. economist at Deutsche Bank Securities, said he expects the Federal Reserve will need to take more drastic steps to cool inflation, which he thinks would increase the risk for a recession in 2023. Deutsche Bank forecasts that consumer inflation, excluding often-volatile food and energy prices, will ease from current levels by the end of 2022 but will remain well above prepandemic levels.

“In the near term, we see an economy that is strong and resilient, but in a way that continues to put upward pressure on prices and wages," Mr. Luzzetti said. “That will necessitate a more aggressive monetary policy response, which we think is the source of the recession," he added.

Mr. Bernstein at the White House said the pandemic has created a set of economic circumstances that don’t readily fit into traditional calculations about whether a recession is on the horizon.

“Rather than try to jam this unique and bespoke economic moment into a probability model, I think it’s better to try to sort out the headwinds and tailwinds," Mr. Bernstein said. “And when we do that, we see an economy that still has fundamental strengths."

Inflation presents a vexing challenge, both for the administration and the Fed. Consumer prices rose 8.3% in April from a year earlier, meaning Americans of all stripes are paying more for gasoline, groceries and travel, even if they feel secure in their jobs.

What’s more, an economy that was rapidly expanding since early 2020 has shown some signs of slowing, contracting in the first quarter.

Larry Summers, Treasury secretary in the Clinton administration, told the Journal earlier this month that he believes a recession in the next two years is more likely than not: “I think the risks are just quite substantial," he said.

Economists surveyed by The Wall Street Journal in April on average put the probability of the economy being in recession sometime in the next 12 months at a still-moderate 28%, but up from 18% in January and just 13% a year earlier.

Mr. Biden has continued to push for the next phase of his economic agenda, calling for higher taxes on the wealthy and large corporations in part to help fund investments in social programs the administration argues would help lower everyday costs for families. Mr. Biden has been unable to win Congressional approval for that agenda amid concerns from Sen. Joe Manchin (D., W.Va.) and Republicans, who say more spending will stoke even more inflation.

Josh Bivens, director of research at the Economic Policy Institute, a left-leaning think tank, said Mr. Biden’s proposed economic policies would help prepare the economy for any possibility of recession: “It would just give the Fed a larger margin of error for overshooting a little bit and I think that’d be a good thing."

Mr. Bivens said he believes the most likely scenario is a so-called soft landing, in which the Fed brings down inflation without triggering a major slowdown in the labor market.

Glenn Hubbard, a top economic adviser to former GOP President George W. Bush, said he thinks that a recession in 2023 is more likely than not, but that many Americans will feel the impact of slower growth even if there isn’t an outright contraction in U.S. gross domestic product over consecutive quarters.

“A lot of this to real people is going to seem like hairsplitting because it’s going to feel like a recession, no matter what we call it," Mr. Hubbard said.

Rising interest rates as a result of the Fed’s actions will make car and home loans more expensive, for example.

Mr. Hubbard said presidential administrations don’t have much room to respond directly to Fed policy given the tradition of the White House respecting the central bank’s independence. But Mr. Hubbard said the Biden administration should steer clear of any action that would add to inflationary pressures.

“When you’re in a hole, stop digging," Mr. Hubbard said. “The last thing we need is to add to inflationary pressures at a time when the Fed is trying to reduce them."

This story has been published from a wire agency feed without modifications to the text