Washington (CNN) – Prices will get better in the US, it will get better rain, shine or shine.
That was the message from President Joe Biden on Tuesday as the United States faces a crucial week for the economy entering a turbulent year.
The combination of high oil and gasoline prices in the wake of the Russian invasion of Ukraine, concerns about inflation caused by ongoing disruptions in the supply chain, and fears that the Federal Reserve will raise interest rates sharply, has sent the market down.
Bottom line: “It’s a pretty bad storm,” George Washington University economics professor Joanne Weiner told What Matters.
Here’s what to know about this week’s Federal Reserve meeting on Tuesday and Wednesday, and why it matters.
All eyes on Wednesday’s meeting
To fight inflation, the US central bank is expected to raise the benchmark interest rate by three-quarters of a percentage point, the largest increase since 1994.
The decision comes after the Federal Reserve raised the interest rate by half a percentage point in May, the largest increase in 22 years.
CNN’s Matt Egan explains it this way: The fact that the Fed is decidedly moving away from zero shows confidence in the health of the labor market. But the speed with which interest rates are expected to rise underscores his growing concern about the rising cost of living.
Investors expect the Fed to raise its target range to around 4% by the end of the year, from 1% today. For context, Egan notes, rates were as high as 5.25% before the Great Recession.
But what does this mean for consumers? More information from Egan: Every time the Federal Reserve raises interest rates, it becomes more expensive to borrow. This means higher interest costs on mortgages, equity lines of credit, credit cards, student debt and auto loans. Corporate loans will also become more expensive, both large and small.
Americans will initially experience this change in policy through higher borrowing costs: getting a mortgage or a car loan is no longer so cheap. And the cash deposited in bank accounts will eventually gain something, though not much.
What are the risks? That the central bank goes abroad and slows the economy so much that it accidentally causes a recession that increases unemployment.
Why such a sharp rise in the interest rate?
To borrow an old phrase, bad times require drastic measures.
If you feel like your paycheck is running out faster than before, you’re not alone. Americans across the country are feeling the effects of inflation…everywhere.
The typical American household spends about $460 more per month than it did last year on the same basket of goods and services,
According to Mark Zandi, chief economist at Moody’s Analytics. For the first time, a gallon of regular gasoline now averages $5 across the country, according to Saturday’s reading from the American Automobile Association. (AAA).
The latest release of the Consumer Price Index, the government’s primary measure of inflation, offers no solace in other respects: The price of food purchased to eat at home has risen 11.9% in the past 12 months; The Housing Index, which measures rents and other related costs, posted a 5.5% increase. Used car prices rose 16.1%.
However, the Producer Price Index, which measures wholesale prices before goods and services reach consumers, provided some good news.
That indicator rose 10.8% in May compared to last year’s level, according to data released Tuesday by the Bureau of Labor Statistics. Although still a fairly high number compared to historical levels, it is less than the revised 10.9% high recorded in the April reading.
The Fed’s ability to control inflation has dire consequences in Washington. If the upcoming midterm elections turn into a referendum on the economy, for example, the Democrats have a big problem on their hands.
Just look at the S&P 500 Index, one of the largest gauges of the US stock market. The index has lost all of its gains since Biden took office early last year.
The president and Democrats in Congress, of course, recognize the threat a faltering economy poses to their midterm aspirations, along with the burden it may pose in 2024. It’s hard not to look back on recent House decisions.
The White House through that lens.
For example, Biden will visit Saudi Arabia next month, where he is expected to somehow engage with Crown Prince Mohammed bin Salman, something he campaigned against at the time.
Speaking to reporters over the weekend, the president insisted that the trip was not linked to global energy prices, even though his advisers have openly said the need to increase oil production to stabilize prices is the main driver for resuming talks with the Saudis.
The good news for the White House is that economies are not always a good indicator of political prospects:
- Bad economies don’t always make reelection difficult. As CNN’s Paul R Lamonica writes: The market fell 16.5% in the first 510 days of Ronald Reagan’s presidency, which was also a period of historically high inflation. Stocks plunged 25 percent in the early part of George W. Bush’s presidency, when the market was in the midst of a crashing internet bubble and struggling to recover from the events of 9/11. But both Reagan and George W. Bush ended up being re-elected.
- Good economies do not always guarantee reelection. Meanwhile, shares surged more than 20% early on on the terms of George HW Bush and Donald Trump in the Oval Office. Neither man was elected to a second term.
“The bottom line is: I really think we’ve made extraordinary progress in laying a new foundation for our economy,” Biden said on Tuesday. “You’ll see once global inflation starts to subside.”
What if the Fed does not succeed?
The chairman has repeatedly stressed the importance of allowing the Federal Reserve to do its job independently, placing confidence in its ability to handle inflation.
But what if the Federal Reserve pushes the economy into a recession?
“From the 30,000-foot level, if you look at it from the top, I would expect a recession, if we have one, that lasts six months, nine months, something like that,” Zandi told CNN this week. “Unemployment is going to go up from 3.6% to 5.5%, 6%, something like that. Not good, but you know, in the grand scheme of things, kind of typical, comparable to other recessions we’ve had in the past.”
In fact, a growing number of analysts believe the Fed acted too late on inflation to make a “soft landing”. But there have been rare occasions when the central bank has managed to calm the economy and keep prices in check without falling: once in 1965, once in 1984 and 1994.
The good news, according to Weiner, is that the Fed has improved in indicating its intentions: “As long as the Fed does what is expected, things won’t fall apart.”
CNN’s Chris Isidore and David Goldman contributed to this report.