The Federal Reserve must not make President Joe Biden’s mistake when choosing between inflation and the economy.
Three years ago, when confronted with this choice, the Biden administration chose economic growth at all costs — literally, spending trillions to stoke the economy. The result has been (and continues to be) the inflation that won’t go away, even as the economy now appears to be slowing rapidly.
America now finds itself stuck between high inflation and low economic growth. The markets face evidence that inflation is continuing and the economy is slowing. Earlier this month, the Bureau of Labor Statistics reported that March’s overall inflation measure came in too high again at 3.5%, a third consecutive monthly increase. Even excluding the more volatile items of food and energy, the core consumer price index rose 3.8% from a year ago.
More inflation evidence came when the latest measure of personal consumer expenditures also came in high. The overall measure was 2.7%. While excluding food and energy, core PCE (the Fed’s preferred inflation barometer) was 2.8%. Both measures exceeded expectations of 2.6% and 2.7%, respectively.
Sandwiched between the two slices of excessive inflation came low economic growth. The Bureau of Economic Analysis reported that 2024’s first-quarter growth was just 1.6%. That’s the U.S. economy’s slowest growth since shrinking in 2022’s first and second quarters. It also marks a precipitous drop over three quarters: 4.9% (the third quarter of 2023), 3.4% (the fourth quarter of 2023), and now 1.6%.
High inflation and low growth are, of course, the components of stagflation. Presently, they are also at a crossroads for the Federal Reserve.
When the Biden administration arrived at the inflation-economy crossroads three years ago, it didn’t hesitate. Despite the Fed having taken aggressive action in 2020 to lower its interest rates (the Fed funds rate) to effectively zero, inject massive amounts of liquidity into the economy (all while signaling through its forward guidance these would continue), and provide direct assistance to a host of financial markets, the Biden administration insisted on unprecedented spending.
Over its first four years, the Congressional Budget Office projects that the Biden administration will have spent $7.9 trillion above 2019’s pre-pandemic spending level, run deficits of $7.4 trillion, and raised the federal debt to $27.9 trillion (99% of gross domestic product).
Biden’s plan was clearly to both appease the Left and juice the economy. Combined, he felt this decision would ensure his reelection. Undoubtedly underlying it was insecurity over how tenuous his 2020 victory had been: His earlier significant polling lead dwindled to a 4.5% popular vote margin, while just 77,000 votes in Arizona, Georgia, Nevada, and Wisconsin provided his electoral vote victory.
The price Biden paid (and America has been paying ever since) for seeking to buy reelection with massive federal spending was high inflation. By the end of Biden’s first year in office, inflation (CPI-U) was at 7%. And it kept climbing: Halfway through 2021, it hit 9.1% in June. It would not dip below 4% until a year later, in June 2021, when it hit 3% — and it has not dropped below that level since. For 37 straight months, inflation has been well above the Fed’s preferred 2% level.
With Biden unwilling to take his foot off the spending pedal, the Fed was forced to intervene. During 2022 and 2023, the Fed raised rates 11 times from a historic low of effectively 0% to today’s 5.33% — the highest level in a generation. Those higher interest rates ironically have fed back into price pressures, especially in housing. The most recent inflation report showed housing costs were up 5.7% from last year.
Nor was spending the Biden administration’s only adverse economic contribution. By blocking the full development of America’s energy resources, it has left supply below where it could have been and energy prices higher than what they should be.
Now add to that Biden’s persistent attempts to forgive student loans, which have the effect of dumping more money back into a market that is already oversaturated.
The Biden administration has dumped this mess before the Fed as it stands at the inflation-economy crossroads. There’s no question which direction Biden would take — he has done so for more than three years. Equally, there’s no question what the Fed should do: put a definitive end to Biden’s inflation.
It’s not the government’s job to create prosperity, and it’s certainly not the Fed’s. The government’s proper role is to ensure that the fundamentals are in place for the private sector to create it — then to get out of the way and let the private sector do so.
In particular, the Fed’s role is to ensure a stable money supply. No one else can do that job, and only by doing that job can inflation be excised from the economy. The Fed now must be the adult in the room. In other words, it must not be Biden.
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J.T. Young was a professional staffer in the House and Senate from 1987 to 2000, served in the Department of Treasury and the Office of Management and Budget from 2001 to 2004, and was the director of government relations for a Fortune 20 company from 2004 to 2023.