However much Republicans hated the substance of President Joe Biden’s so-called Inflation Reduction Act, Democrats could at least boast that they passed a sizable deficit reduction. But no longer.
But whatever goodwill the Democratic Party earned with its social and environmental spending bill’s $300 billion 10-year deficit reduction, Biden has single-handedly incinerated it. And in doing so, he has signaled to the Federal Reserve that it’s on its own to save the country from ruinous stagflation. If ruling Democrats cannot even feign commitment to monetary contraction for longer than a fortnight, why would Fed Chairman Jerome Powell and the Fed not go all in on the war on inflation?
It’s not that the legislation was ever actually going to reduce inflation in any meaningful or immediate way. But at least it wasn’t going to make things worse. It was a show of good enough faith that the Fed felt entitled to pretend it had a partner in tightening the money supply. At minimum, the Joe Manchins and Tim Ryans of Washington could boast that Democrats wouldn’t go out of their ways to make the Fed’s path forward even more austere.
But now all bets are off. With his student loan order, Biden has unilaterally voided whatever deficit reduction the bill theoretically generated. And in practice, it may cost much more than that — up to $1 trillion.
Powell was late to see through the idea that inflation was “transitory” or that it had peaked. After two inadequate federal funds rate hikes of 75 basis points, markets had settled on their decadelong assumption that the Fed would keep saving them forever.
But now, at last, Powell has refused to save them. In Jackson Hole, Wyoming, he sent stocks plunging when he promised “some pain” for households as he follows through on the Fed’s “unconditional” duty to “deliver price stability.”
Powell was finally appropriately hawkish despite a spate of OK news about personal consumption expenditures inflation, the Fed’s preferred measure of price stability. That’s because Powell now understands that he’s no longer working around Biden’s Washington. He’s working against it to save the country — against a president who would rather score political points with his party’s far Left than acknowledge and fight the worst inflation in four decades.
Powell once worried that he would overshoot in his fight against inflation and stagnate the economy. If Jackson Hole made one thing clear, it’s that that’s not true anymore. Biden has his own hubris to thank.
