By Howard Schneider
WASHINGTON (Reuters) – U.S. Federal Reserve Chairman Jerome Powell and the candidates for three seats on the Fed’s board of directors will testify on Capitol Hill on Wednesday, laying out over several hours of hearings a set of points of view. view that could largely shape the economic conditions the country faces in a contentious presidential election. election campaign next year.
The themes will probably sound familiar to you given the current consensus driving central bank policy: inflation is too high and interest rates must remain restrictive to combat it; the labor market remains solid and may even have to weaken for prices to cool; the March bank failures did not fundamentally shake the financial system.
But the economic landscape next year, when the United States could face a game-changing rematch between incumbent Democrat Joe Biden and former Republican President Donald Trump, could well be made or broken by the coming decisions of the Fed on the degree to raise interest rates, and whether the bias remains in favor of controlling inflation, even at the possible cost of a recession.
“The economy faces multiple challenges, including inflation, banking sector stress and geopolitical instability. The Federal Reserve must remain vigilant to all,” Fed Governor Philip Jefferson said in a statement. prepared testimony released on Tuesday, before Wednesday time at 10:00 a.m. (1400 GMT). ) Senate Banking Committee confirmation hearing for his nomination as Vice Chairman. “Inflation has started to decline and I remain focused on getting it back to our 2% target.”
Fed Governor Lisa Cook is in the running for a 14-year term on the seven-seat board of governors, and Adriana Kugler, the US executive director of the World Bank and the original Fed board’s first nominee Hispanic, has been nominated for an open seat on the Board of Directors.
Across the Capitol complex, Powell will appear before the House Financial Services Committee in one of its regular semi-annual monetary policy updates, which will also begin at 10 a.m.
Despite the consensus on lower inflation, the Fed is also reaching a point where views on the need for and timing of further interest rate hikes may begin to diverge. As it has for former presidential incumbents, how this debate is resolved could mean the difference between a benign election-year economy and a corrosive one.
For Biden, the success or failure of Fed policy could mean a “soft landing” of continued economic growth, lower inflation and slightly higher unemployment, or it could force him to campaign amid rising unemployment, stubbornly higher prices and punishing interest rates for anyone trying to buy a house or a car or finance a business.
The outcome of the Fed’s inflation battle may still take months to unfold, and “the closer it gets to election day, the worse it is for Biden,” said Preston Mui, senior economist at Employ America. , a research and advocacy group that focuses on full employment policies.
Mui said recent data has made a “soft landing” more likely, though the Fed is still poised for further rate hikes that could increase the possibility of a recession or an unnecessary hike. unemployment.
At its meeting last week, the Fed kept its benchmark interest rate steady between 5% and 5.25%, but officials predict rates will need to rise half a percentage point by now. the end of the year because inflation has come down so slowly and remains more than double that of the Fed. 2% target.
JOBS AND INFLATION
At this point in his first term, Biden is receiving particularly low marks for his handling of the economy, despite near-record unemployment, steady job gains and rising wages.
Rising prices, which at one time or another have affected food and gasoline as well as discretionary goods and a variety of services, may be one of the reasons.
In a Reuters/Ipsos poll conducted June 2-5, just 35% of those polled approved of Biden’s economic handling. Some 53% disapproved, according to the poll, which had a margin of error of three percentage points.
Only 25% of respondents approved of Biden’s handling of inflation.
Much of this work has fallen to the Fed, but it is a central bank created by Biden. If the current crop of nominees is approved, five of the seven board members would be nominated by Biden. It would also be the most diverse board in Fed history, with two black board members including the vice chairman, the first Hispanic, and as many women, three, as white men, the traditional recruiting pool. from the Fed.
Powell was first elevated to Fed Chairman by Trump but reappointed by Biden.
The Fed under Powell has raised interest rates faster than at any time since former Fed Chairman Paul Volcker’s inflation struggles in the 1970s and 1980s.
Although Fed officials and economists disagree on the need for a compromise with unemployment to control inflation – a concept deeply rooted in economics, with a “loosening” of the hand- saw price pressure ease – policymakers at last week’s central bank meeting projected the jobless rate will continue to rise by 2024.
The increases are modest, rising from 3.7% currently to 4.1% by the end of the year. But the rate also continues to rise through the election year, to 4.5% – the equivalent of around 1.3 million jobs lost from the current level.
For U.S. electoral politics, a backdrop of rising unemployment is challenging for incumbents, and May’s data shows some of the risk for Biden. The jobless rate for black Americans, a constituency at the heart of its 2020 victory, jumped nearly a full percentage point — a rise that, if sustained or increased, could raise the political stakes around the fight against Fed inflation.
(Reporting by Howard Schneider; Additional reporting by Jason Lange; Editing by Dan Burns and Andrea Ricci)