Mere days after President Joe Biden boasted during his State of the Union address that inflation is dropping, the Labor Department revealed that the consumer price index rose by 3.2% in the year ending in February, well past economist expectations and up from 3.1% in January. Worse still, both headline CPI and core CPI, that is, the Federal Reserve’s preferred inflation measure sans the volatile categories of food and energy, rose by a staggering 0.4% in February. That’s a 4.8% inflation rate annualized, or more than twice the Fed’s maximum 2% target annually.
The Fed’s most recent monetary tightening campaign was the fastest in some 40 years, bringing the federal funds rate from virtually zero to over 5% as it succeeded in bringing CPI inflation from the near-double digits to 3.2% today. But unlike the Paul Volcker era of the ’80s, when the central bank was working in conjunction with disinflationary fiscal policy from the White House, the Fed’s current campaign has been and continues to be diametrically opposed to Biden’s agenda. And now, as inflation across the board threatens to creep back up, the president has announced a budget proposal with a galling $1.8 trillion deficit for the next fiscal year.
Although the president and his sycophantic stenographers in the media have lied that his 2025 budget proposal would slash the deficit by $3 trillion, that’s a promise of only cumulative savings over the course of a whole decade, and only relative to baseline budget projections. In other words, it’s a “reduction” only from the exorbitant predictions of what the Congressional Budget Office expects if we continue to do absolutely nothing about runaway entitlement and post-COVID discretionary spending.
In reality, Biden wants to increase 2025 spending by $300 billion and raise taxes with the hopes of increasing revenue by $400 billion, a feat that is not only politically unlikely but also economically unfeasible given the reality that we are already approaching the top of the Laffer Curve.
All in all, Biden’s 2025 budget amounts to an inexcusably high $1.8 trillion deficit, in line with the $2 trillion deficit of this year and last year.
In a less stupid society, the notion of a president proudly proclaiming his aim to rack up a $2 trillion deficit while presiding over a peacetime economy would garner outrage. And when his profligate spending has already catalyzed higher overall prices by 18% in just three years, it should make his candidacy for reelection a nonstarter. Yet even as Biden approaches low approval levels reserved for used car salesmen and speeding tickets, the Democratic Party has doubled down on the delusion that the crisis is too little spending, not too much.
All of this puts the Federal Reserve in a most unenviable and crucial position. Despite the Fed’s explicit projections that it would cut the federal funds rate three times throughout this election year, investors were wishcasting as late as this January that the central bank would cut rates twice as many times. Even though persistently high job creation and inflation prints well above expectations have brought Treasurys futures back in line with the Fed’s initial projections, there’s a possibility on the other side that nearly nobody considered: What if inflation and jobs data remain so hot that the Fed never pivots prior to Election Day?
Given the fact that inflation data are fueled by expectations of behavior by both the Fed and the rest of the federal government, it’s a possibility that Democrats double down on an explicitly inflationary fiscal agenda. If so, the Fed may feel obliged to stick to higher-for-longer with absolutely no cuts if inflation prints persist at nearly twice the Fed’s target. Digging into the data, that’s not an impossible projection.
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Take the proposition of “Team Transitory,” which has posited that much of our inflation progress is due to the resolution of supply chain disruptions stemming from the pandemic and Russia’s invasion of Ukraine. Indeed, core goods inflation has fallen much more than core services inflation, which is still nearly three times the Fed’s inflation target. But that would imply that our current overall inflation rates are much stickier. Because goods deflation can’t continue much further (already, apparel and used car deflation seem to have hit their nadir), we’re stuck with trying to bring down services prices, a much harder task. The best-case scenario may very well be that the Fed holds rates without a single cut this year. The worst-case scenario is that it is actually forced to raise rates in an election year.
And if that is indeed the case, Biden, who has fought the Fed, kicking and screaming every step of the way, has nobody to blame but himself.