Although President Joe Biden has so far adhered to his promise to respect the independence of the Federal Reserve, fellow Democrats continue to refuse to play quite so coy, with Rep. Ro Khanna (D-CA) overtly calling upon Chairman Jerome Powell to juice the economy in time for the president’s reelection by cutting the federal funds rate. Unluckily for cynics wishing to play politics with the central bank, the Fed remains data-dependent, and the data overwhelmingly indicate that despite the White House’s best efforts otherwise, the Fed is slowly but surely pulling off a soft landing.
After a gangbuster third quarter of 4.9% annualized economic growth last year, the economy once again exceeded expert expectations, closing out 2023 with 3.3% annualized growth in the final quarter. In large part, robust consumption growth drove GDP, but perhaps more significant was yet another quarter of growth in government spending.
Biden is in a bit of a catch-22 here. While Democrats think Powell cutting rates would save his waning reelection prospects, not only will the Fed refuse to do so, as the economy still hasn’t hit the skids in a way that would remotely warrant that, but doing so prematurely would likely only hurt his hopes even further. After all, inflation, not interest rates, is the real reason the public is truly disgusted with Bidenomics.
Prices are up 18% overall since Biden took office, with the real value of an average weekly paycheck down 5%. For the average worker who receives paychecks every other week, that’s the equivalent of Uncle Sam, or Grandpa Joe, stealing 1 1/2 of your 26 paychecks each year. And that inflation kills growth.
Despite the nominal stock market boomlet last year, the S&P is delivering 7% growth in real terms only now. As a point of comparison, the S&P was delivering 36% real return under Donald Trump right before the pandemic. And recall, the overwhelming majority of that growth is coming from the AI binge and the Magnificent Seven. The rest of the market is mostly flat.
Despite investors wishcasting their dreams of premature monetary easing in the Treasury futures market, most measures still indicate that while inflation has indeed slowed down, it remains nearly twice as high as the Fed’s maximum target. Powell cannot and likely would not save Biden, and for savers and earners, that’s a good thing.