President Joe Biden has a matter of months to convince gloomy voters that he’s built a thriving economy. Democrats now think he’ll get a hand in doing so from an unlikely source: the Federal Reserve.
Biden allies who spent the last year fearful that the Fed’s effort to curb inflation would tip the nation into recession have suddenly changed their tune with the central bank on the verge of pulling off a so-called soft landing.
The rate-hiking campaign that ballooned people’s borrowing costs and weighed on economic forecasts appears over, without major damage to the job market in its wake. And after a brief pause, Fed officials are indicating they may reverse course and start actually cutting interest rates. They got another green light signal on Friday when the Commerce Department reported that inflation grew by just 1.9 percent over the last six months, putting it under the 2 percent yearly level that the Fed has long made its target. Biden, in a statement, called it “a significant milestone.”
That shift, he and other Democrats hope, will serve as a definitive signal to voters that the economy has emerged from a sea of challenges far stronger than before — just as the presidential race hits full stride.
“Lowering the interest rates would be huge,” said Celinda Lake, a Democratic pollster for Biden’s 2020 campaign, calling it a key element in making Americans more optimistic about the future. “What’s important for voters is not so much the absolute level of the economy, but the direction of the economy.”
The White House has no plans to break its long-standing silence on the Fed, much less demand that Chair Jerome Powell take specific actions — an approach that marks a sharp departure from former President Donald Trump's practice of routinely pressuring the bank's policymakers.
But the mere act of feeling anticipation, rather than dread, for the Fed’s next moves represents a newfound sensation for much of the Democratic Party. Fed Chair Jerome Powell’s 21-month bid to rein in soaring inflation involved 11 rate hikes, pushing the bank’s benchmark interest rate to its highest point in more than two decades.
The aggressive push frustrated leading Democrats who were concerned it would derail the economic recovery that Biden had orchestrated to that point. Senate Majority Leader Chuck Schumer and Sen. Elizabeth Warren (D-Mass.) led open rebukes of the Fed earlier this year, with Warren accusing Powell of putting millions of jobs at risk.
And though the White House has maintained a strict policy against commenting on the Fed, some Biden aides — convinced inflation was being driven largely by lingering supply chain problems — privately worried that the bank was misreading the moment.
The U.S. nevertheless averted a recession, buoyed by continued job growth and a surge in Americans’ willingness to spend.
“The soft landing has happened. We’re there, we’ve landed, our feet are on the ground,” said Seth Harris, the former deputy director of Biden's National Economic Council. “The question is, how long before people start feeling that?”
The gap between the macroeconomic news that the White House has begun openly embracing and the lagging public sentiment about the state of the economy is now the predominant concern facing the administration. With prices still elevated, polls consistently show voters mired in a sour economic mood.
The White House has spent recent weeks emphasizing specific areas where prices are now coming down. But the Fed, Harris and others argue, can play its own broadly influential role in bolstering voters’ view of the economy as on the upswing. The central bank could choose to lower rates as soon as early 2024, and with inflation nearing the Fed's target, some Wall Street analysts project three separate cuts throughout the year.
“There’s a lot of ongoing bitterness about the extent of past inflation, but in terms of current conditions, I think the highest interest rates in a generation are one of the last things that really shout abnormal to a lot of voters,” said Tobin Marcus, a former economic adviser to then-Vice President Biden and current head of politics and policy at Wolfe Research. “I do think that bringing those down could have a fairly significant effect.”
There are varying views on when and by how much the Fed might begin cutting rates, even among those officials charged with the decision-making. But already there are early indications that the Fed's shifting stance may be reverberating through the economy.
The stock market rallied to new highs over the past month, as it became clearer Powell’s rate-hike drive was nearing an end. Consumer confidence in December hit its highest point since the summer, according to the Conference Board’s latest reading. More concretely, mortgage interest rates have dipped, a move that's made home buying somewhat more affordable.
And critically for Biden officials who bristled over the monthslong predictions of a recession, the Fed’s fresh talk of easing rates has driven a change in the conversation among the economic experts who play an outsized role in shaping perceptions of the economy.
“I think it will slowly start to dawn a little bit more on people who convey the news about how the economy’s doing,” said Mike Konczal, the director of macroeconomic analysis at the Roosevelt Institute, a left-leaning think tank. “We’ve gone from determining who gets blamed to determining who gets credit.”
There’s still some trepidation over whether a soft landing will prove to be the turning point in how voters view the Biden economy. The president remains well underwater when it comes to his handling of the economy, and there’s little guarantee conditions will all keep trending in the right direction.
The labor market could abruptly falter, robbing Biden of one of his strongest selling points. Inflation has not yet reached the Fed’s target rate of 2 percent, meaning any setback could prompt the central bank to abandon all talk of rate cuts. And there’s the perpetual political hurdle the White House faces of ensuring that Biden and his policies get credit for any shift in voter attitudes toward the economy.
“What I fear is that everyone is going to credit the Fed with the soft landing,” said Harris. “When rates went up, employment did not go through the floor, and I really want folks to focus on the fact that the economy now is different because of fiscal policy that Biden and Democrats drove through — not merely because of monetary policy.”
Top Biden officials have taken a series of year-end victory laps to that effect, touting the administration’s work to unsnarl supply chains and pass sweeping investments in climate and infrastructure that, they say, juiced the economic recovery.
On the campaign trail, Biden is betting that he can win over skeptical voters with a two-pronged strategy that both emphasizes his accomplishments and details all the popular policies that Trump is likely to roll back if he’s returned to office.
“Republicans are against so many critical actions that help working and middle-class people,” Biden said during a Wednesday speech in Wisconsin. “These are the same Republicans that enacted tax cuts to overwhelmingly benefit the wealthy to the tune of a $2 trillion additional deficit.”
Biden officials have expressed confidence those tactics will begin to pay off in 2024 as more voters tune into the presidential race. But there’s hope among Democrats that lower rates might give voters a boost in the meantime that, in turn, brightens Biden's political prospects — and turns the Fed from a source of frustration into a well-timed friend.
“A lot of the tenor of next year will be, we got through the reopening, we got through a lot of tough stuff,” Konczal said. “If you can’t convince people things are good, you can at least tell them the bad things are increasingly in the rearview mirror.”
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