The economic challenges facing Jerome Powell and Joe Biden

This week, President Joe Biden nominated Jerome Powell to a second term as Federal Reserve Chairman. Biden’s decision to do so indicates that his administration prioritizes maintaining stability and consistency in the Federal Reserve at a time when the country’s most urgent economic priority is controlling inflation and rising consumer prices.

Furthermore, Biden’s renomination of Powell was an important and necessary step for the president to take in order to demonstrate his commitment to keeping the Federal Reserve independent from political gamesmanship. Biden rejected calls from progressives to nominate a Democrat for the position, who would have likely increased regulations on banks and expanded the reach of the Federal Reserve by focusing on their role in climate change.

Though the Federal Reserve is not a political institution and should not be politicized, we also can’t ignore the reality that Powell’s success — or lack thereof — at addressing the country’s urgent economic challenges will ultimately impact voters’ perceptions of Biden’s handling of the economy. 

Specifically, the central challenge to Powell in his second term will be walking the fine line between controlling inflation and rising prices while also being careful not to raise interest rates in a way that curbs economic growth, causes stagflation, or leads to another recession. 

The Federal Reserve cut interest rates to nearly zero at the onset of the coronavirus pandemic, and Powell has said that rates would remain there until the economy had reached maximum employment and inflation had exceeded its 2 percent target to make up for past shortfalls.

While the unemployment rate has declined substantially to a pandemic-era low of 4.6 percent, rising consumer prices have become a real concern for Americans, as the inflation rate is currently 6.2 percent — the highest it’s been in 30 years.

In turn, the surge in inflation has put more pressure on Powell and the Federal Reserve to unwind its asset purchasing program and begin raising interest rates sooner than anticipated. However, it is a seemingly unsolvable conundrum, which is made even more complicated by the unpredictability of the pandemic: If the Federal Reserve fails to raise interest rates, then inflation surges; but if they raise rates too much, it could invite a recession.

That being said, inflation is nearing crisis levels, and consumers are bearing the brunt of increased costs. As a result, many Americans are unsatisfied with the state of the economy. November’s measure of consumer sentiment also fell to its lowest level in a decade — worse than at any other point during the pandemic — per the University of Michigan Consumer Sentiment Index.

Americans’ overall economic discontent is one of the driving forces behind their dissatisfaction with President Biden, fair or not. Last week, Biden’s approval rating fell to a new low of 41 percent approve, 53 percent disapprove, according to an ABC News/Washington Post poll. Seven-in-10 voters now say the economy is in bad shape, only 39 percent approve of Biden’s handling of the economy, and close to one-half blame him for inflation.

Though Powell and the Federal Reserve are primarily responsible for controlling inflation at this point, Biden does have agency in leading the country’s economic recovery, and in no way is the president completely reliant on the monetary policy set by the Federal Reserve, nor is he at the mercy of external economic forces.

The Democratic party has been caught up in intraparty negotiations over the president’s “Build Back Better” plan since August, and thus hasn’t been engaging in a conversation on voters’ immediate anxieties about the economy — namely, rising consumer prices — and many Democratic politicians have been dismissing inflation as “transitory.” 

Republicans have worked — with some success — to tie Biden’s agenda to even higher inflation, despite some experts’ assessments that the Build Back Better Plan would not increase inflation in a meaningful way. Even so, a plurality of voters (43 percent) believes that the Build Back Better plan will make inflation worse, compared with just 26 percent who think it will make inflation better, per a Morning Consult & Politico survey released last week.

Recently, Biden at least began acknowledging that inflation and rising consumer prices are a real problem. In a speech last week, the president appropriately recognized that inflation is “one of the most pressing economic concerns of the American people — and it’s real.”

In addition to concerns over inflation and rising consumer prices, gasoline prices have also risen steadily over the last year, and the national average is around $3.40 a gallon, up 61 percent from a year ago. 

To try and temporarily alleviate soaring prices, President Biden said Tuesday that the administration will tap the Strategic Petroleum Reserve as part of a global effort to control the rapid rise in fuel prices. The administration could also take a further — though less politically convenient — step of calling for a slower, steadier transition away from the use of fossil fuels.

The American economy is at a critical turning point. Biden and Powell — individually and collectively — face mounting economic crises. Their success, or lack thereof, at addressing these challenges will be determinative not only for Biden’s reelection prospects but even more importantly, for the country’s economic recovery.

Douglas E. Schoen is a political consultant who served as an adviser to former President Clinton and to the 2020 presidential campaign of Michael Bloomberg. He is the author of “The End of Democracy? Russia and China on the Rise and America in Retreat.”