Indeed, inflation is the dominant topic of conversation when it comes to the U.S. economy. This change is particularly striking given that inflation reached a 40-year high last year in 2022. The Federal Reserve has a long-term inflation target of 2%. It has been unsuccessful in getting inflation back down in this range. Just last month, consumer prices soared by 2.7% year-over-year, a clear indication that inflation continues to be a worrisome concern. The discussion around inflation goes much further than economists. In one of the more traditional political moves, former President Donald Trump and current President Joe Biden are trying to take the other to task.
The negative effects of increasing inflation are widespread, impacting everything from consumer ability to purchase goods to the entire financial sector. No doubt Trump is pleased by the respective coverage of his and Biden’s economic policies over the last year or so. In fact, recent comments from Federal Reserve Chair Jerome Powell suggest that tariffs could be the primary cause of inflation. Most notably, he underscored the fact that these tariffs have not led to that runaway inflation some had feared at the start of the year.
Inflation and Its Causes
Inflation is one of the most important signs of an economy that’s getting too hot. 2022 was an extreme year for inflation in the U.S., as we reached some of the highest rates in four decades. Moving on from loan activity, inflation has been of great concern to policymakers lately. This alarming development has driven discussions among policymakers and economists to assess what exactly is driving inflation.
Powell reiterated that tariffs play an important role in driving up inflation. On the one hand, he pointed out, the runaway inflation everyone feared never happened. This problem of inflation is further complicated by a range of different economic policies and market forces that are at play.
“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
Or think of what Trump’s proposed economic policies have been—massive direct cash payments and very low interest rates. These proposals have raised alarm about their potential inflationary impacts. The laws of supply and demand mean that all these measures will increase demand. Worse, if supply doesn’t come online, this would be a counterproductive step that worsens inflationary pressures.
Political Responses to Inflation
The political landscape around the economy — particularly inflation — has gotten more polarized. Democrats have been pummeled for their roles in stimulus measures perceived to be inflationary. In March 2021, Biden and a Democratic-controlled Congress passed a nearly $2 trillion stimulus package aimed at supporting individuals and businesses during the pandemic. Some critics even maintain that this flood of new money was partially responsible for driving prices higher.
More aggressively, some Democrats dismissed concerns raised by skeptics as alarmist or incendiary. At the same time, Trump seized the opportunity to voice his displeasure. First, on the campaign trail, he has cast blame toward Biden, claiming that the Biden administration’s policies have led to today’s economic crisis.
“The United States should be rewarded for SUCCESS, not brought down by it,” – Donald Trump
Despite these critiques, economic experts are still divided over the actual impact of stimulus measures on inflation. Others claim that stimulus is enough to jumpstart demand on its own. As long as growth in demand doesn’t outstrip growth in supply, it won’t cause persistent inflation.
The Future of Monetary Policy
As we look forward, the Federal Reserve’s role will be indispensable overall, specifically in acting with intentionality to address these economic headwinds. Installing a new Fed chair who aligns with Trump’s views on lower interest rates could have significant implications for future monetary policy. While lowered rates can start an economic growth cycle, they would increase inflationary pressures.
The Fed can and should do more to help sustain the nascent economic recovery. Along with that, it needs to make sure inflation doesn’t get out of hand. And luckily for us, both Trump and Biden are making this a priority right now. At the same time, the Fed’s decisions will play a key role in determining the nation’s long-term economic landscape.