There are still almost 240 days until the US congressional elections, so it is much too early for projections or even results. But the first forecasts for the outcome of the election have long been available, they are emblazoned on tens of thousands of billboards across the country: Florida, for example, reported a smooth 5.00 this week, Illinois transmitted values up to 5.33, California even up to 6.07.
These are the prices for a gallon of premium petrol (3.8 liters), and even if German motorists can only laugh at the average cost of around 1.15 euros per liter, it does not bode well for President Joe Biden and his party. Because with all the own goals that the Democrats have scored since their election victory 16 months ago, with all the global political crises for which they are not responsible: What really threatens to break their necks on November 8 is the high US inflation rate, which is increasing is rapidly approaching the eight percent mark.
Guardian of price stability: US Federal Reserve in Washington.
(Photo: OLIVIER DOULIERY/AFP)
Since he himself has hardly any means to stop the trend, Biden has little choice but to rely on an instrument that party strategists would have thrown their hands over their heads with: interest rate hikes by the US Federal Reserve (Fed). They are intended to help dampen the economic boom fueled by billions in corona aid packages and to prevent the development of a spiral of permanent wage and price increases. Whether and when the Fed will initiate the change of course will be decided this Wednesday at the regular meeting of its monetary policy committee in Washington.
Almost all experts are assuming that Fed Chair Jerome Powell and his colleagues will follow up on their latest suggestions and raise the so-called overnight target range by a quarter point from the current zero to 0.25 percent to then 0.25 to 0.5 percent. That doesn’t sound like much and would in fact initially have hardly any direct effects on economic and price developments. However, it would send a clear signal to consumers, companies and politicians that the Fed, after months of hesitation, is now taking the risk of inflation seriously. In addition, the central bankers had already signaled at the end of January that such an initial increase should be followed by several more in the course of this year. However, that was before the Russian invasion of Ukraine.
The wave of inflation has meanwhile gripped large parts of the US economy
If the Fed actually initiates the end of the zero-interest phase, not only Biden, but also the majority of experts would agree. Because the wave of inflation in the USA is now so broad that it can hardly be explained by the pandemic and the associated global supply bottlenecks alone. According to an overview of the news agency Bloomberg almost two-thirds of all goods and services included in the calculation of the consumer price index cost at least four percent more in February than in the same month last year. In January, the rate was still below 50 percent.
What worries the Fed even more, however, is that hundreds of thousands of Americans appear to have permanently turned their backs on the job market during the pandemic. This exacerbates the already existing skills shortage in the country – and of all things at a time when, after two years of restrictions, consumers are more willing than ever to spend some of their savings. The result is that employers outperform each other with wage increases, bonuses and starter candy. Some companies pay job applicants hundreds of dollars just to show up for an interview.
Almost all experts are assuming that Fed Chair Jerome Powell and his colleagues will follow up on their recent hints with action.
(Photo: JONATHAN ERNST/REUTERS)
For Biden, the salary increase in the accounts of many citizens is basically good news – and the central bankers around Powell, contrary to all clichés, are by no means gray, unempathetic numbers servants who would not care about the weal and woe of ordinary employees. However, if the companies try to recoup the higher wages by further increasing their sales prices, then the dreaded spiral is in fact set in motion, which can only be stopped by an emergency monetary policy brake and subsequent recession. To prevent this, the Fed relies on steady but small rate hikes that make credit more expensive and ideally slow down the boom gently and in a way that protects the economy.
In the worst case, the Fed triggers the very recession it actually wants to prevent
As if this tightrope walk wasn’t difficult enough, Russia’s war against Ukraine and its global economic shock waves are now added to the mix. The immediate economic consequences for the USA are likely to be comparatively minor at first, because unlike many EU countries, the Americans import hardly any energy and agricultural products from the two conflict countries. However, the global price increases for oil, gas, coal, wheat, corn and many other commodities will also reach the United States indirectly and further increase inflationary pressures there. In addition, some US industries, such as the auto industry, are very dependent on raw materials from Russia and Ukraine, such as nickel and palladium. And the stock exchanges could also play a disastrous role: if they continue to collapse due to the ongoing political conflicts between the USA and the EU on the one hand and Russia and China on the other, the buying mood of American citizens is likely to be over quickly .
In the worst case, the Fed would raise interest rates just as the apparently robust post-coronavirus economy was beginning to weaken again. In view of record inflation, doing nothing is probably not an option either. However, if the monetary watchdogs do not act cautiously, they may end up triggering the very recession they actually wanted to prevent with the interest rate hikes.
In view of the problems, Biden has already put together a communication strategy that should take effect if prices continue to rise – core message: Vladimir Putin is to blame! However, he cannot frighten the opposition Republicans, who want to win back both the House of Representatives and the Senate from the Democrats in November, with this slogan. On the contrary, their rallying cry may be even more catchy for US voters. It reads: Joe Biden is to blame!