Fed policymakers are due to meet on Wednesday and are expected to take a breather after more than a year of interest rate hikes. This keeps alive hopes of a so-called soft landing, where the economy can avoid a recession even if growth slows. But they may not be done forever as inflation remains high, and just keeping rates where they are will likely be a burden for many people.
To be clear, economic confidence is still quite low, with only about a third of Americans approving of Biden’s handling of the economy. But it can’t be a total coincidence that Gallup polls show the number improved markedly with falling gas prices last year and has been more stable recently.
Chief JPMorgan US economist Michael Feroli said falling food and fuel prices could also explain why consumers have lowered their forecasts of where they expect inflation to be in the near term. The New York Fed reported on Monday that consumer expectations for inflation a year from now have declined.
Stifel’s Brian Gardner, however, warned that prices are still much higher than they were before the pandemic.
« Any kind of shift in thinking is going to be slow because while the price increase is slowing and possibly peaking, we’re still dealing with some sharp increases over the last couple of years, » he said.
Gardner said this could be tricky for Biden in his message ahead of the 2024 election, especially since the administration — as well as Fed Chair Jerome Powell and many forecasters — initially argued that inflation would be only « transient. »
« To the extent that inflation can fall below 4% and approach 2%, the White House and the Biden campaign would be on firmer footing, » Gardner said. « But I think because of their credibility problem from the onset of inflation, they’re going to have to be a little careful about that. »
A White House official said the data undeniably shows progress is being made. « We are not taking stock of what the predictions will be, but what happened, » the official said. « There’s still work to be done, but we’re moving from a CPI above 9% to 4%. »
Economic sentiment in the US is also heavily driven by partisanship, so Republican politicians will continue to use inflation to rally support regardless of how it performs now, said George Washington University professor Sarah Binder.
« Certainly, falling gas and food prices — things Americans are noticing most — will take the bite out of Republican attacks, » he said. But « with a Democrat in the White House, Democrats think inflation will be lower than Republicans. »
Meanwhile, many prices are still rising, and annual headline inflation, which includes food and energy, is still at 4%. So a potential victory lap isn’t in the cards for quite some time yet.
« More economic headwinds remain on the horizon, including stubbornly high sheltered inflation, increasingly tighter monetary policy, as well as the possibility of a recession, albeit likely a mild one, as we approach an election year, » he said Libby Cantrill, head of public policy at PIMCO.