Powell Can't Do It Alone—Stop the Spending
Monetary and Fiscal Policy Cannot be This Detached from One Another
“Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man.”
-Ronald W. Reagan, 40th President of the United States
Jerome Powell has the toughest job in Washington. As the Chair of the Federal Reserve, his duties involve simultaneously curbing inflation, maximizing employment, and averting a recession while reducing consumer demand through stricter monetary policies, such as increasing or maintaining the federal discount rate. Being the Fed Chair is essentially a nightmarish series of contradictions, a role where disappointing everyone simultaneously is almost inevitable.
Amid economic mismanagement by much of the Biden administration and Congress's irrational, wasteful spending habits, Mr. Powell's efforts to tighten the monetary supply are undercut by a Federal government that appears to spend recklessly. Consequently, inflation shows little sign of abating, economic growth is stalled, and government policies remain unchanged.
The OECD forecasts a modest GDP increase of 2.6 percent in 2024, which is expected to slow to 1.8 percent by 2025 due to the negative impacts of high borrowing costs and reduced consumer demand. This forecast contrasts starkly with the 4.1 percent GDP growth of 2019 under the pre-COVID Trump administration. Given the sluggish GDP growth coupled with persistent inflation, we may face a scenario reminiscent of the 1970s-era stagflation.
Markets and economists were unsettled when, after projecting first-quarter growth at 2.5 percent, it achieved only 1.6 percent. Further concerning was the inflation data; the PCE (personal consumption expenditures) index, the Federal Reserve's preferred inflation gauge, reported inflation at 3.4 percent. The core consumer price index reflected a 3.8 percent increase over the last 12 months, significantly above the Federal Reserve's target of 2 percent.
The Biden administration and pundits inside the Beltway will insist that inflation has abated, as 3.4 percent is still lower than the 9 percent peak in 2022. Some of a more liberal persuasion, like The Washington Post’s Eduardo Porter, have even argued, "There's a case to be made for around 3 percent inflation." Of course, there are numerous reasons why this argument is laughable. A lower inflation rate maintains purchasing power and protects monetary value, thereby boosting savings and investment by both businesses and consumers; financial predictability encourages long-term investment decisions, which drive growth through increased productivity. Higher inflation rates also induce premature spending due to expectations of price increases, which overheat the economy and require further Fed intervention.
However, I could make a more straightforward argument from a mathematical perspective: considering core inflation is 3.8 percent, which could be rounded up to 4 percent, perhaps adhering to a 2 percent target is ideal because 4 percent is double 2 percent, and we neither want nor should be comfortable with the idea of inflation being twice as high as the target. Yet, in reality, we are ascribing more blame and believing too much in the power of Mr. Powell and the rest of the Fed to wrangle the inflation beast when, frankly, the administration and Congress bear most, if not all, of the blame. The federal government ran a $2 trillion deficit last year, the national debt is a staggering $34 trillion (around 122 percent of GDP, higher than in WWII), and the United States now pays more in interest payments than on defense for the first time.
And while all eyes are on November's presidential election, the challenges for the next president will be unlike anything faced since perhaps Herbert Hoover inherited an economy in depression in 1929. 2025 will prove to be the mother of all fiscal cliffs: $5 trillion in debt, five times greater than the $787 billion 2009 stimulus, which at the time was considered an unthinkable amount of spending justified purely by the nature of the economy being at its worst since the 1930s. Moreover, should Mr. Biden emerge victorious in November, his intention to allow the 'Trump Tax Cuts', the Tax Cuts and Jobs Act of 2017 (TCJA), to expire will result in dramatic tax increases and reduced deductions unless Congress passes another tax cut. Considering the likelihood of the Democrats recapturing the House (irrespective of the presidential or Senate outcome), the idea of a favorable, pro-growth, and pro-consumer tax cut from a Democratic House is as plausible as a magic unicorn showing up in my driveway tomorrow morning.
Another addition to the fiscal crisis is the Obamacare subsidy for households earning between 100 and 400 percent of the federal poverty line (FPL), which is also set to expire alongside the TCJA. Mr. Biden's substantial spending packages have extended this suspension to 2025. So, we are destined for a standoff between Congressional Republicans, who wish to preserve their tax cut, and Congressional Democrats, who want to keep their Obamacare subsidy.
Presumably, Democrats wanted the Obamacare subsidy expiration to coincide with the tax cut; if Mr. Biden is reelected, the likely scenario is that he will extend the TCJA in exchange for preserving the subsidy. If Donald Trump secures a presidential comeback, he may leverage border wall construction and the TCJA extension from Democrats in exchange for preserving the subsidy. The issue here is not the political negotiation; it's the cost.
Also coming around in 2025 are the spending negotiations for Mr. Biden’s infrastructure bill; expect lobbyists to descend upon the capital like a swarm of locusts, pilfering money and subsidies we cannot afford. Extending these provisions, and various others would add around $5 trillion to the debt over the next decade, necessitating another hike in the debt ceiling, as our current compromise also ends in 2025. Of course, the silver tsunami, a reality no party wishes to confront, should make landfall around this time, with Medicare and Social Security projected to run a $649 billion deficit that will amount to $69 trillion over the next 30 years. The borrowing will result in $47 trillion in interest costs, making Social Security and Medicare, in total, a $116 trillion addition to the debt over the 30-year period.
And so, while this election will be dominated by teleprompter mishaps, court cases, slipping down stairs, porn star hush money, and brain worms, neither candidate seems particularly concerned with addressing this looming fiscal crisis. The only candidates who bothered to critique Mr. Trump for adding to the deficit, Ron DeSantis and Nikki Haley, did not win. Therefore, we are stuck with two, and if counting Robert F. Kennedy Jr., three candidates who will do nothing but spend, spend, spend.
And so, while government spending will increase to unprecedented levels and ultimately expand the monetary supply and worsen inflation, Mr. Powell and the Federal Reserve will face incredible pressure to cut rates; they already are now. Markets have been pricing in rate cuts and twisting themselves into a knot over the belief that the Federal Reserve must, and will, cut rates this year—an inaccurate way of thinking in light of inflation remaining far above the intended target. Mr. Powell, like any good Fed chair, has shied away from directly criticizing both Congress and the President, but the reality is that for him to do his job, Congress and the White House must do theirs.
Our fiscal problem stems, particularly with this administration's policies (such as the Biden administration’s proposed student loan forgiveness program that would cost $240-500 billion over the next decade), from a government bent on pumping infinite amounts of free money into the economy while constraining supply and excessively regulating business, thus decreasing supply. And while, regarding spending and regulation, Mr. Trump would indeed be preferable to Mr. Biden, he is not fiscally conservative; there is no dollar a populist won’t spend if he believes a vote can be gained. Do not expect any presidential candidate, Democrat or Republican, to take this debt problem seriously until the 11th hour.
Mr. Powell, whom I’ve criticized in the past for his delayed reaction to inflation, finished last year and continued on a redemption arc of gigantic magnitude. He did not falter to external pressure in his rate-hiking campaign. He powerfully dismissed the ludicrous idea that central banks must regulate climate change, remaining independent of the whims of either party or any president. Yet, the central bank cannot act alone. If anything, believing that it can cure all ailments leads only to more politicians scapegoating the unelected bankers for what are, in reality, the failings of the empty suits on Capitol Hill. The United States must follow the example of Macron’s France and begin serious austerity measures; the next president and Congress must lower the deficit. Our current path is unsustainable; an economy with 3.9 percent unemployment should not be running a $2 trillion deficit, and such excessive spending makes it impossible for the Federal Reserve to maintain price stability, which means the inflation problem will be here to stay.