In their first policy meeting in nearly a year, Joe Biden gave Jerome Powell something no other president has given to a Federal Reserve chairman: his blessing to raise interest rates.
Biden, in brief remarks given Tuesday afternoon in the Oval Office, said he would respect the Fed’s independence as it took steps to cool down inflation, which has been running at a four-decade high.
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“My job as pTresident is not to nominate highly — not only nominate highly — highly qualified individuals for that institution, but to give them the space they need to do their job,” Biden said. “I’m not going to interfere with their critically important work.”
While Biden did not explicitly endorse a tightening regime, the Fed has made its commitment to less accommodating monetary policy clear in recent months. It has raised its benchmark interest rate twice since March and has promised more of the same until inflation is in check. Beginning Wednesday it will shed as much as $47.5 billion in assets from its balance sheet monthly.
The hands-off approach was seen by some as a political move, one that signals the White House’s focus on taming inflation while also shifting the onus for doing so onto the central bank.
Karen Petrou, managing partner at Federal Financial Analytics, said the high-profile meeting was a way to “separate the administration from the Fed when it comes to fighting inflation.” It could also be a way for the president to hedge his bets, she added.
“If inflation meaningfully abates, then the White House can take credit and politely recognize the Fed,” Petrou said. “If inflation stays about the same or worsens, then the emphatic emphasis on independence sets up the Fed as the inflation fall guy.”
Norbert Michel, vice president and director of the Cato Institute’s Center for Monetary and Financial Alternatives, noted the irony of extolling the apolitical status of the Fed while inviting Powell to the White House. He said the contradiction was especially glaring given reports that the administration was beginning a campaign to quell public concerns over the economy ahead of this fall’s midterm elections.
“If that’s true, where’s the independence?” Michel said. “And if the administration’s top priority is fighting inflation, what does that mean for the Fed? Do they have independence as long as they fight inflation?”
Others are taking the president’s message at face value. Kate Judge, a Columbia University Law School professor who specializes in banking and financial regulation, said Biden’s comments show he understands the impact of rising prices and accepts that the blame for continued inflation will lie at his feet.
“I don’t think the president ever gets a pass when Americans feel like they are facing economic hardships, whether it takes the form of unemployment, inflation or something else entirely,” Judge said. “President Biden seems to appreciate that, as the meeting reflects.”
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The president has no direct authority over the Federal Reserve or its Board of Governors, which controls the nation’s monetary policy, but that has not stopped previous presidents from trying to influence the central bank’s decision-making for political gain.
In 1965, Lyndon B. Johnson summoned then-Fed Chair William McChesney Martin Jr. to his ranch in Texas to excoriate him for raising the discount rate. Richard Nixon pressured then-Chair Arthur F. Burns to adopt an expansionary monetary policy to support the labor market ahead of the 1972 election. And, in 1984, Ronald Reagan’s Chief of Staff James Baker ordered Paul Volcker not to raise interest rates ahead of that fall’s election, the late former chairman recalled in a 2018 memoir.
Most recently, Donald Trump repeatedly used the bully pulpit to urge the Fed not to raise interest rates. Trump called out Powell by name in numerous tweets, even referring to him as an “enemy.”
Brian Deese, director of the National Economic Council, noted the contrast between Biden’s support of the Fed and the positions of his predecessors during Tuesday’s White House press briefing.
“That’s not an approach that the previous president took to this issue,” Deese said. “It has not been an approach that presidents in the past have taken. And this president has underscored and is underscoring that … he will do that, and I think that that’s what you should take away … from his acknowledgement of the responsibility that the Fed has.”
The state of the economy today is different from prior episodes when the White House and the Fed were at odds with one another, Judge said. Typically, presidents have pushed for more accommodative policies that support gains in the labor market even if they are at the expense of the broader economy, she explained. Today, a different trend is playing out.
“Unemployment is low but that hasn’t led voters to feel positive about the economy,” she said. “Instead, they are worried about the cost of filling up their car and buying groceries.”
David Wessel, senior fellow in Economic Studies at the Brookings Institution and director of the Hutchins Center on Fiscal and Monetary Policy, said these conditions have put the interests of the White House and the Fed in alignment. But, he notes, that alliance could prove to be short-lived.
“For now, both the Fed and the Democrats have common interest in reassuring Americans that today’s inflation will not persist,” Wessel said. “Of course, the political winds could shift if the Fed keeps raising rates and the unemployment rate starts rising.”
Both before and after the meeting, the White House told the public to brace for a slowdown in the labor market. In an op-ed published in The Wall Street Journal on Monday, Biden said average monthly job gains could fall from 500,000 to roughly 150,000. Tuesday afternoon, Deese described this a shift to a more “stable” job market that would allow the administration to “take on inflation” without sacrificing recent employment gains.
Along with trusting the Fed to handle monetary policy, the White House outlined several other remedies for inflation, most of which require congressional action, such as passing legislation for clean energy tax credits, expanding the housing supply and capping drug prices.
Petrou said the White House can only do so much to mitigate blame for a struggling economy if inflation persists into the fall, but this approach is as good as any.
“The public will probably still blame the White House, but this is at least the beginning of a political defense ahead of the midterms and it might just work given how much most Americans distrust the central bank,” she said.
As for the Fed, Michel said backing of the president could prove useful down the line as it continues to rein in monetary policy.
“I’d venture that if the Fed has to tighten more aggressively, meetings like this will help them more than the other way around,” Michel said.
Even if support from White House and the Democrats begins to falter, Wessel said he expects the Fed to continue doing what has to be done to put the economy on a course for stability.
“After all,” he said, “Jay Powell stood up to Donald Trump.”
