[China & US][US]"Respecting the independence of the Fed", what is Biden trying to imply?
Lian Jun, Economic Daily
On May 31, local time, US President Joe Biden met with Treasury Secretary Yellen and Federal Reserve Chairman Jerome Powell at the White House to focus on inflation. Before the meeting that day, Biden expressed his respect for the "independence of the Fed". After the meeting, Yellen admitted in an interview that her prediction last year that "the rise in inflation would not cause lasting problems" was wrong and that the US economy had been hit hard. Some U.S. media believe that the Biden government to face the inflation problem anxious, dealing with inflation is likely to trigger a recession, Biden's statement is in the responsibility to the Federal Reserve. This move warns that the international community needs to be prepared for a situation where the US may not be able to effectively deal with inflation and a recession.
So far last year, under the impact of the epidemic, the Ukraine crisis and other factors overlapping, the United States inflation data continued to climb. In March this year, the US Consumer Price Index (CPI) rose by 8.5% year-on-year, the highest rate since December 1981, and in April the CPI also increased by 8.3% year-on-year. Against this backdrop, what do the US authorities' statements on inflation last week mean?
Firstly, it indicates a change in the US authorities' expectations of economic recovery. After the outbreak of the epidemic, the US quickly introduced ultra-loose policies in an attempt to boost recovery by pushing up demand and treating the ensuing supply chain bottlenecks and persistently high inflation as temporary problems. However, contrary to expectations, while artificially amplifying the demand, the conflicts left by the US for many years, such as the decline of manufacturing industry, aging infrastructure, degradation of labour quality and even unfair distribution of social wealth, have concentrated on erupting, and labour supply has become extremely short under the dual role of subsidies and the epidemic, and the supply chain problems formed by these factors have not been alleviated so far, making the inflationary pressure in the US increasing. The situation has been exacerbated by the ongoing crisis in Ukraine, increased sanctions against Russia in Europe and the US and soaring commodity prices since this year. In the face of the severe inflation situation, the US authorities have been unable to hide their ears, Yellen's statement is bowing to reality.
Secondly, it reflects the pressure that high inflation is putting on the Democratic Party's mid-term election campaign. High prices are already causing widespread concern in the US. A poll jointly sponsored by the Washington Post and ABC in late April showed that as many as 94% of Americans were worried about inflation. This concern has begun to affect Biden's approval ratings. According to the US media, with the mid-term elections on 8 November only six months away, the high inflation the US is experiencing is extremely embarrassing for the Democratic administration, with some surveys showing that Biden's approval rating is near an all-time low. Therefore, Biden's sudden emphasis on "respecting the independence of the Federal Reserve" does have the suspicion of shifting the blame.
Again, Biden's emphasis on "respecting the Fed's independence" also implies an encouragement to the Fed to let go of tightening policy. Over the years, the United States has overdrawn the credit of the dollar as the main international currency, especially the risk of the dollar cyclically triggering global market shocks, and more and more countries have begun to consider getting rid of their excessive reliance on the dollar. The crisis in Ukraine has had a knock-on effect, triggering voices and actions to "de-dollarise". This is something that the US authorities will not tolerate. The US interest rate hikes and tightening of policy will have a negative impact on the US stock market and economic recovery, but will help boost the dollar index.
To this end, it needs to be stressed that countries need to be prepared for a possible recession in the US. The negative impact of inflation on the US economy is already evident. 26 May saw the release of revised figures from the US Department of Commerce, which showed that US gross domestic product fell by 1.5% in the first quarter of this year on an annualised basis, a downward revision of 0.1 percentage points from the initial figure. And just last week, a number of executives from Wall Street institutions, including Bank of America and Goldman Sachs, warned that the risk of a US recession was starting to become higher. Tesla CEO Musk even said in an email to employees that he had a "super bad feeling" about the economy. In addition, the Fed's accelerated tightening will increase capital outflows from countries, especially developing countries, and increase the risk of sovereign debt defaults. These factors have increased the systemic risk to the global economy, and it is important to be proactive and prepared.