At the start of the year, investors expected the Federal Reserve to cut the federal funds rate from a 23-year high at least six or seven times. By March, Treasury futures had downgraded their expectations of rate cuts to just three times throughout 2024, as the central bank had predicted at the end of last year. But with the release of March’s too-hot consumer price index report, markets are now considering the once impossible: the now 1-in-3 probability that the Fed does not deliver a single rate cut before Election Day.
To his credit, President Joe Biden has not expressly browbeaten the Fed into juicing the economy to resuscitate his flailing reelection bid, but the president’s proponents have done so for him, with Rep. Ro Khanna (D-CA) overtly calling upon Fed Chairman Jerome Powell to play politics with price stability and prematurely slash borrowing costs. But the data increasingly argue against cutting rates at all, let alone sooner rather than later, and Biden has nobody but himself to blame should Powell not deliver a relaxation of monetary policy before Election Day.
Headline CPI blew past investor expectations to 3.5% in March, and core CPI stagnated at 3.8%, or nearly twice the Fed’s maximum inflation target of 2%. Splicing the data only paints an uglier picture. Core CPI over the past six months on an annualized basis came in at 3.2% for March, but on a one-month annualized basis, it shot up to 4.6%. So-called “supercore” inflation, which strips core CPI services of housing, is up to nearly 5%, or the highest level in almost a year. Meanwhile, persistent job and GDP growth continues to assure the Fed that no recession is yet imminent. In other words, growth is too good to ask for a rate cut, and price stability is still too volatile to justify one.
Powell, a student of former Fed Chairman Paul Volcker, does not want to recreate the inflation rebound triggered by the lack of monetary discipline of Volcker’s politically compromised predecessor, Arthur Burns. But unlike Volcker, who eventually succeeded in taming the inflation dragon because he had a partner in President Ronald Reagan, who took fiscal discipline seriously, the White House’s fiscal policy is currently opposed to the Fed’s monetary tightening. As the Fed intentionally keeps mortgage rates high in the hopes of breaking the housing affordability crisis, Biden brags that his $5,000 and $10,000 housing credits to first-time buyers and sellers would lower effective mortgage rates by a point and a half, the opposite of what the Fed wants. And while the Fed also warns of the threat posed by Uncle Sam’s repeated $2 trillion annual deficits, Biden boasts that he will again attempt to circumvent the Supreme Court and bail out another $50 billion of student loan debt owed to the Treasury.
The second worst-case scenario for the Fed, which has continually rebuffed attempts to strip the central bank of its political independence, both real and perceived, is to deviate from the three rate hikes it had telegraphed, but the worsening inflation situation may very well force it to do so. But the absolute nightmare scenario for the Fed? Having to restart the rate hikes, which, thanks to the federal government’s ridiculously over-leveraged balance sheet, would be tantamount to pressing the brake pedal and the gas pedal at the same time.
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And even without a single rate hike, Bank of America projects that simply delivering no rate cuts would bring the United States’s total interest payments for the year to $1.6 trillion, rendering it the single largest spending category in the federal budget. If so, Biden heads to the polls with a worsening inflation crisis, no relief from the necessary chemo of sky-high interest rates, and a budget crisis incoming.
Voters will not be distracted from the fact that prices have increased by 19% already during Biden’s presidency with the temporary boomlet of lower credit card APRs. They will not forget that food prices are up 21% and energy prices are up 37% with a lower mortgage rate. They will just remember that they’ve lost 5% of their real wages, and when confronted with the reality of inflation, Biden has expressly chosen to exacerbate the problem. And he has nobody but himself to blame.