US consumer prices increased by 2.7% nationally over the last year. Even more than the hike itself, this increase has raised alarms about the impacts of inflation and economic instability. This increase comes after a rocky stretch where inflation hit a 40-year high in 2022. Policymakers and economists are still hard at work figuring out the implications of these sweeping changes. They are urgently monitoring the supply and demand balance, particularly in light of recently introduced economic proposals that would further fuel inflationary headwinds.
The Federal Reserve’s new approach to fighting inflation has stirred up plenty of debate already. This is the debate between the greater economic plans offered by former President Donald Trump and current President Joe Biden. With inflation remaining above the Fed’s long-term target of 2%, experts are evaluating the potential consequences of stimulus measures and interest rate adjustments.
The Inflationary Landscape
Inflation is the most popular scapegoat for a growing economy’s excesses. When demand for goods and services increases faster than supply, businesses raise prices, generating inflation. Recent economic stimulus proposals have argued that providing consumers with $2,000 checks would increase consumer demand. This strategy does nothing to address the current supply challenges. Consequently, this could further fuel inflation.
The Federal Reserve Chairman Jerome Powell has pointed to tariffs as a key factor contributing to persistent inflation, which has defied efforts to stabilize prices. “Tariffs are solely responsible for inflation that has remained above the Fed’s 2% long-term target,” Powell stated. This interpretation underscores the dynamic relationship between public policy and prosperity.
The almost $2 trillion American Rescue Plan stimulus package with Biden and the Democrats in control of Congress enacted an additional $1,400 direct checks to taxpayers. Critics of this approach had expressed grave concerns. They cautioned that injecting such a large sum of money all at once would send prices soaring, but Democrats largely ignored these warnings in 2020.
Economic Proposals Under Scrutiny
Now that inflation has returned to the economy, Trump’s ideas for growing the economy have faced increasing skepticism. In a prior 4-page memo, Mnuchin allegedly suggested that doubling the stock market would increase economic growth by up to 20% per year. Many economists caution that lowering interest rates and implementing stimulus measures without addressing underlying supply issues might lead to inflated prices down the line.
These issues lead us to wonder what happens if we appoint a new Federal Reserve chair—the not-so-death dragon in the room. What happens if the new chair focuses on lowering interest rates instead? And market analysts are interpreting the suggestive tone of the Fed that its new, dollar-monitory, helicopter-pilot leader is expected to steer the Fed’s rate-setting committee in. This would be hugely significant. If it leads to policies that increase demand without a corresponding increase in supply, the impacts would be significant.
“I want my new Fed Chairman to lower Interest Rates if the Market is doing well, not destroy the Market for no reason whatsoever,” – Donald Trump
During the inauguration of President Biden, the economic landscape was characterized by a historically high unemployment rate. The economy experienced an astounding recovery with 6.1% GDP growth in 2021, recovering from pandemic-related losses. This paradoxical duality creates a headache for policymakers as they attempt to provide necessary economic stimulus while achieving stable, non-inflationary prices.
The Road Ahead
Both parties face a challenging economic climate, but perhaps the greatest point of overlap lies in their potential approach. The political pressure to respond to inflation might push Trump and Biden to take parallel steps in their economic platforms. The effects of these proposals are sweeping, running dangerous ripples through businesses, financial markets, and most concerning, consumers.
That dynamic of supply and demand is still helping to inform conversations around what future economic policies should look like. At the same time, Congress is looking at even more stimulus. Inflation is still a top priority issue, so it’s even more important to assess the economic proposals on offer against what they would deliver.