The Fed and the Biden Administration Are Pushing the Economy to the Brink

Let’s understand what happened. The pandemic did two things as far as the Fed is concerned. It shut down select industries including transportation, creating supply bottlenecks. And it enabled large numbers of people who remained employed to increase their savings, since they eliminated most of their daily routines such as commuting and eating out. Money piled up in their accounts with excess savings peaking at over $2 trillion. 

At the same time, the federal government poured trillions of dollars into government support and climate change initiatives through two mega-bills landing just as the pandemic was ending. So the administration adopted an expansionary, anti-fossil fuel policy at the same time office buildings were being left empty as people adopted work from home, tanking the real estate industry and center city businesses.

The result of this combination of pandemic-related changes, increased savings, pent-up demand and fiscal irresponsibility was runaway inflation. The consumer price index broke 9% in summer 2022. This outcome was the logical result of these policies. Economists like Larry Summers foresaw it, even as the current secretary of the treasury tried to play it all down as transitory and not much to worry about. 

In came the bloodletters. Using interest rates as its primary weapon, the Fed proceeded to drain the economy. It raised interest rates in ways that kill the stock market, kill the housing market, reduce corporate investments and will eventually increase unemployment. The Fed’s ever-changing policies also increase uncertainty as government policy becomes a guessarama and businesses pull back their investment plans. 

The result is an economic slowdown meant to reduce the rate of inflation, but with no turning back the clock on the new higher costs of middle-class life. Groceries and gas prices are up 20% in two years while mortgages are hitting a two-decade high. 

The political scene is turning ugly. The government is blamed for the increased costs that households feel every day. That’s why despite good employment numbers, 61% of voters think the economy is on the wrong track, according to the latest Harvard CAPS/Harris Poll. Wall Street is signaling that stagflation is the likely outcome of all this misguided fiscal and monetary policy. A perfect storm is gathering. Fiscal and climate policies jerk up inflation, then monetary policy tries to wrench down the economy. That’s setting up a negative feedback cycle: Fiscal policy will push more inflation, the Fed will cause more economic pain, and the result is potential economic collapse as each half operates to defeat the other.

The right thing to do is for the administration to rework its policies and restrain government spending while phasing in the promotion of electric vehicles and pushing cleaner fuels like natural gas and nuclear but also striving for energy self-sufficiency. It needs to adopt an “all of the above” energy philosophy, letting technology develop for the next five years. Otherwise the country will be caught in a vise between the Chinese rare-earth minerals needed for electric vehicles and the OPEC cartel, which could raise energy prices further as oil looks on track to hit $100 a barrel again. We also probably need to enact temporary commuter subsidies to encourage people to return to work in cities to forestall a commercial real estate crisis with $1.5 trillion in commercial real estate debt looming. The current policy mix features government debt expansion and household economic contraction. This is a political powder keg. Half the country sees their financial condition as deteriorating. 

The change in fiscal policy to cut discretionary spending and bring down the price of energy will then allow the Fed to drop interest rates. Lower energy prices mean lower food costs, and lower interest rates mean lower housing costs. Stock market and asset values would return, as would corporate investment. The net effect of these programs would be to lower the costs of middle-class life and return to a virtuous cycle of growth. 

The key is a return to fiscal and climate policy sanity—and easing off destructive monetary policy that may rein in inflation but at too high a cost to its citizens. That will likely reverberate in the election as angry voters have a way of registering their discontent at the ballot box. President Clinton took this direction in the mid-90s and the results were spectacular. Will our politicians learn from those policies or continue down a path that is not working? 

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