Inflation Battle Is Getting Tougher, Fed Chief Warns

Inflation Battle Is Getting Tougher, Fed Chief Warns

Jerome Powell
By Yuval Rosenberg and Michael Rainey
Wednesday, June 29, 2022

Happy Wednesday! On this date in 1767, the Associated Press reminds us, "Britain approved the Townshend Revenue Act, which imposed import duties on glass, paint, oil, lead, paper and tea shipped to the American colonies. (Colonists bitterly protested, prompting Parliament to repeal the duties — except for tea.)"

Now for some more recent fiscal developments:

Powell Says Inflation Battle Is Getting Tougher

Federal Reserve Chair Jerome Powell said Wednesday that the central bank aims to break the back of inflation, and there’s no guarantee that it can spare the U.S. from recession as it does so.

A growing number of economists are worried the Fed will push too hard in its effort, sacrificing jobs and growth as it drains liquidity and slows the economy, but Powell made it clear that he is more worried about inflation than recession. "Is there a risk we would go too far? Certainly there’s a risk," he said. "The bigger mistake to make—let’s put it that way—would be to fail to restore price stability."

The main worry for the Fed is that economic conditions have changed fundamentally, driven by the pandemic and the Russian invasion of Ukraine, which threaten to push prices for basics like food and fuel higher for an extended period of time. "The risk is that because of the multiplicity of shocks you start to transition to a higher inflation regime," Powell told a panel at the European Central Bank conference in Portugal. "Our job is literally to prevent that from happening, and we will prevent that from happening. We will not allow a transition from a low-inflation environment into a high-inflation environment."

Powell also indicated that the post-pandemic economy could be transformed, both by the inflationary wave and the battle to control it. "The economy is being driven by very different forces," he said. "What we don't know is whether we'll be going back to something that looks like, or a little bit like, what we had before."

Clock is ticking: Powell said bank officials see a need to move quickly. "The clock is kind of running on how long will you remain in a low-inflation regime," he told the conference.

At the same time, Powell said that it has become "significantly more challenging" to achieve the Fed’s goal of a soft landing, in which the growth remains positive and unemployment rises only modestly. "The pathways have gotten narrower," he said.

Speaking at the same conference, European Central Bank President Christine Lagarde said she doesn’t think "that we are going to go back to that environment of low inflation." And Cleveland Fed President Loretta Mester said that the central bank has adjusted its overall view of inflation. Before the pandemic, the Fed was more worried about overreacting to inflation and stifling growth in the name of price stability. Now, the balance has shifted, and reining in inflation is taking precedence. "The more costly error is assuming inflation expectations are anchored when they are not," Mester said.

Dems Mull a Smaller, ‘More Business Friendly’ Tax and Spending Package

Senate Democrats are reportedly working to cut back their proposed tax hikes as they look to reach a deal on a slimmed-down economic package with Sen. Joe Manchin (D-WV), the holdout who controls the fate of the bill.

Bloomberg News reports that Democrats are considering a range of changes to their tax plans that would make the package "more business friendly" and also lessen the hit to wealthy households. But negotiators still face a slew of contentious decisions as they close in on a bill with a topline of roughly $1 trillion, significantly less than the $2.2 trillion in new spending contained in version of the budget reconciliation bill passed by the House late last year. Bloomberg reports that the new outline, yet to be finalized, calls for about $500 billion in new spending and $500 billion in deficit reduction over 10 years.

Among the thorny — and politically perilous — choices Democrats have to make is whether to extend enhanced Affordable Care Act subsidies provided as part of the 2021 American Rescue Plan Act. Those increased subsidies are set to expire, potentially leaving millions of Obamacare enrollees facing higher premiums for 2023. "Including the roughly $200 billion ACA premiums in a $500 billion spending package would entail scaling back the $550 billion climate provisions from the House bill," Bloomberg reports.

The bottom line: Democrats have long been aware that any deal they reach will jettison many elements of the package they hoped to pass last year as they try to appease Manchin, but the details here will matter both in terms of policy and politics. Any deal will have to come together within weeks.

Schumer and Pelosi Play Hot Potato With Covid Funding

The Biden administration has said that additional pandemic funding for tests, treatments and vaccines is urgently needed, but the money has been stalled in Congress for months. The New York Times reports that the legislation is now bogged down by Democratic infighting and finger-pointing. "Senate Democrats say they are waiting for the House to take up legislation, while House Democrats say the next move is up to the Senate," the Times’ Sheryl Gay Stolberg writes. "Senator Chuck Schumer, the majority leader, and Speaker of the House Nancy Pelosi each say the other is responsible for pushing the bill forward."

The funding was derailed after House Democrats objected to an initial plan to offset the proposed spending by redirecting previous pandemic funding for the states. Senate Republicans then insisted that a smaller $10 billion bipartisan compromise aid package be accompanied by an amendment vote on a pandemic immigration policy.

Now what? "With the aid package all but dead in Congress, the Biden administration recently said it would repurpose $10 billion from other programs to purchase vaccines and treatments," Stolberg writes. "About half of that money will go to antiviral therapies, the rest will be used to purchase vaccines. But it is unclear how far the money will go if the vaccines need to be reformulated."

The White House announcement angered Sen. Mitt Romney (R-UT), who had negotiated the $10 billion compromise deal and said the administration’s shuffling of money meant that earlier claims that it was running out of pandemic funding "was patently false."

The bottom line: Talks over another round of Covid aid funding appear to be going nowhere. The saga here is another example of why people can’t stand Congress.

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