Biden Respectfully Reminds You Inflation Is Fed’s Thing

Over the last 48 hours, Joe Biden made it pretty clear who voters should blame if inflation doesn’t recede sometime between now and the midterm elections. Spoiler alert: Not him.

Biden addressed inflation, the Fed and the Fed’s role in containing inflation, at the White House on Tuesday, but before that, he published an Op-Ed in the Wall Street Journal.

“I have made tackling inflation my top economic priority,” Biden wrote, introducing a three-part “plan.” Part one entails preemptively blaming Jerome Powell. Biden didn’t put it that way, of course, but he might have. “First, the Federal Reserve has a primary responsibility to control inflation,” he said, adding that unlike Donald Trump, he won’t “demean” Powell.

That was Monday. Fast forward to Tuesday, and Biden was unequivocal. The plan, he explained, while sitting across from Powell, “starts with a simple proposition: Respect the Fed, respect the Fed’s independence.” That’s actually two propositions, but combining them serves a purpose. By holding the Fed up as a wholly autonomous institution unburdened by the whims of an overbearing executive, Biden is effectively absolving himself of responsibility for inflation. He’s washing his hands of it by reference to his obligation to safeguard Fed independence.

It’s not the worst strategy. Trump didn’t respect the Fed or its independence and he ran roughshod over both while publicly blaming Powell for holding back growth and being insufficiently helpful in the trade war. As adept as Trump was (and still is) at turning his fervent base against purported antagonists, real and imagined, he never really succeeded in demonizing Powell, likely because monetary policy just isn’t all that interesting. Absent an economic crisis, which Trump didn’t have, it’s hard to get regular people excited about the fed funds rate. Sure, there’s an entire cottage industry built on Fed conspiracy theories, but the vast majority of voters just don’t care all that much, especially not when inflation is subdued and things seem to be going ok.

At a certain point, Trump’s Fed tweets probably felt gratuitous (or at least confusing) even to his most ardent supporters. And not because they didn’t want someone else to hang, figuratively or, in the case of January 6, 2021, literally. But rather because, for many voters, it wasn’t immediately clear who “Jay” was and what he did wrong. “Lock her up!” resonated with Trump’s base. So did “No collusion!” By contrast, “As long as other countries are receiving the benefits of negative rates, the USA should also accept the ‘GIFT!'” just didn’t have the same ring to it.

Maybe Biden’s less direct — some might call it obliquely cynical — approach will be more effective. But probably not. A passive strategy for deflecting blame isn’t likely to be any better than Trump’s full-on public assault. In order to passionately blame the Fed for something, you have to put in a modicum of effort to understand what it is the Fed does, and why it is they’re responsible for slow growth, an ineffective trade war or, in this case, rapidly rising prices.

The simple answer is that inflation is their responsibility. It’s not quite a “You had one job!” scenario, because technically they have two. But their other job is maximizing employment, and they’ve achieved that — and then some. In fact, they’ve done such a bang-up job with… well, with jobs, that their success on that side of the mandate is undermining their capacity to meet their other goal.

But, again, most voters don’t have a solid grasp of monetary policy or macroeconomics. Or maybe they do. And maybe that’s the real problem for politicians trying to blame the Fed, directly, by trampling on its independence, or indirectly, by “respecting” it. Regular people don’t theorize about the economy, they experience it. They know, intuitively, that inflation, as it’s currently manifesting in America, isn’t entirely attributable to math mistakes committed by a handful of technocrats. That’s a ridiculous proposition, and nobody will buy it, especially not when the nightly news is a highlight reel of war footage and stories about how the pandemic upended every aspect of the global economy.

To be sure, Biden is keen to blame Vladimir Putin too, but that’s problematic because it raises questions about foreign policy failures, especially given the proximity of Russia’s Ukraine invasion to the fall of Kabul to the Taliban. Voters might well accept that Putin’s war is responsible for the most recent run up in gas prices, but they might also wonder if the situation in Ukraine would be different if someone else occupied the Oval Office.

None of the above is meant to excuse the Fed’s belated response to inflation, and it’s certainly not to suggest Fed policy hasn’t been the bane of many Americans’ existence for the past several decades. My argument is (and always has been), that Fed policy undermines Americans’ quality of life via the cumulative effect of asset price inflation on inequality. Inequality of wealth begets inequality of opportunity, which feeds into still more inequality, in a pernicious cycle. Spiraling inequality is conducive to societal upheaval and serves as a breeding ground for populism on both sides of the political spectrum.

That’s the Fed reality the public needs to understand. It’s not a conspiracy as much as it is an ongoing failure on the part of the institution to admit the embarrassing scope of its role in perpetuating the wealth divide and thereby in fostering the conditions for divisive politics and the demise of civil society.

Compared to that, debates about how much of 8% annual inflation in 2022 can be directly attributed to the Fed waiting six months too long to raise rates or nine months too long to end monthly bond buying are trivial. Many readers will immediately protest that those extra months were defined by an ongoing stock rally and a historic surge in home prices, precisely the dynamic I’ve just blamed for exacerbating inequality. That’s not wrong, but good luck pitching that to voters: “My plan to bring down inflation is to trust the Fed to negate recent increases in the value of your homes and siphon enough off your 401(k)s to bring down the cost of food and gas which are too high because Russia invaded Ukraine.”

Last week, I suggested central banks probably got too much credit for benign inflation and subdued macro volatility since the late 80s. In the grand scheme of things — taking account of well-documented trends in demographics, debt and technology, as well as the disinflationary impact of wave after wave of globalization — it’s not obvious central banks deserve anything more than a polite acknowledgement in a footnote.

Paul Volcker beat inflation into submission with a blunt object, he didn’t finesse it lower by way of strategic brilliance. An alternative history of central banks’ contribution to disinflation thereafter might assign more credit to the spectacular busts they inadvertently facilitated than to political independence, forward guidance or inflation targeting.

If that’s true, and if independent central banks are indeed partly responsible for the deleterious trends in inequality which have contributed to political upheaval, maybe we should just hand the keys to the printing presses back to the politicians. Sure they’d print money, but what have central banks been doing for a dozen years? Sure, we’d likely have rampant inflation, but what do we have now? What do we really have to lose?

The ability to deflect blame, I guess. But the public is always going to blame the politicians anyway, something Democrats will relearn in November. If Biden were inclined to the same kind of political hardball and inflammatory non sequiturs his predecessor habitually employed, he might point out that Powell is a Republican. “Coincidence?!” Trump would tweet, if he were Biden. And if he could tweet.