White House insists economy is strong as allies grow uneasy about Fed

White House insists economy is strong as allies grow uneasy about Fed


President Biden and his top advisers insist the US economy remains strong, even as it shows new signs of weakening and the White House’s own allies express unease about the government’s response to rising prices.

As inflation soared over the last year, Biden and his senior aides repeatedly made clear that they were confident that the Federal Reserve could tame rising prices with higher interest rates and other monetary policy tools.

But with Fed Chair Jerome H. Powell moving aggressively, the White House now faces the prospect that these efforts will prove too much and instead tip the economy into a recession. On Thursday, the Bureau of Economic Analysis reported that growth had contracted for a second consecutive quarter, while business investment and consumer spending fell significantly. Unemployment claims have risen in recent weeks, suggesting new cracks are emerging in the labor market, and the latest inflation report this month showed prices climbed in June by 9.1 percent over last year.

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The dual threat posed by an economy that is slowing markedly and also grappling with sky-high prices has fractured the administration’s allies, with liberal and centrist Democrats increasingly at odds over whether the White House should be alarmed by the Federal Reserve’s actions. Sen. Elizabeth Warren (D-Mass.) and many left-leaning economists fear the Fed’s rate hikes could lead to job losses that reverse gains made under the Biden administration, while others say the White House has to step back as the Fed takes drastic measures to reduce red-hot inflation.

The conflicting impulses reflect a policy bind that threatens to undermine Biden’s presidency ahead of the upcoming midterm elections, as enormous voter discontent mounts over the economy.

“The economic data are flashing red. We don’t need the Fed to tip the economy into a recession, and the numbers show that’s a real risk,” Warren said in an interview. “We have never built a strong economy by trying to put more people out of work, and that is exactly what Jerome Powell is trying to do.”

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Larry Summers, the former Democratic treasury secretary who has been sharply critical of the stimulus law the White House pushed last year, countered: “Our problem is not a Fed that is too aggressive; our problem is a Fed that was much too slow to respond to a rising inflation threat … Many on the far left were principal advocates for ‘team transitory’ last year, and their views have proven entirely incorrect, as the honest have acknowledged.”

As the debate intensifies, the White House is in the awkward position of trying to allay the fears of both sides by saying Powell can still achieve a “soft landing” that averts a recession while the central bank also reduces inflation.

On Thursday, Biden repeatedly extolled the extent of the job gains and economic growth that have occurred under his administration. Treasury Secretary Janet L. Yellen also stressed to reporters that this quarter’s decline in gross domestic product was due to technical factors, such as a decline in business inventories, and that consumer demand remains strong.

“When you look at the economy, job creation is continuing, household finances remain strong, consumers are spending and businesses are growing,” Yellen said. Typically, she said, recessions are characterized by broad closures of businesses and mass layoffs. “That is not what we are seeing right now,” she told reporters.

Citing the strong economic data, Biden also said: “That doesn’t sound like a recession to me.”

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The comments by Biden and Yellen were part of an all-out push from administration officials this week to dispute GOP claims that the economy is already in a recession, noting that pronouncement has historically fallen to the nonpartisan economists at the National Bureau of Economic Research. Many Republicans argued even before the new data came out that two consecutive quarters of economic contraction almost always point to a recession.

The White House strategy could backfire. Already, Biden advisers’ attempts to dismiss inflation as “transitory” last year proved a failure, as the administration was forced to abandon that message as prices kept rising. Their attempts to deny a recession could similarly backfire should one later materialize, overshadowing the political upside even of a breakthrough climate and energy accord in the Senate.

“They should have learned from their experience with the word ‘transitory’ that getting too hung up on labels can lead to bad outcomes. Just because we’re not in a recession today does not mean we won’t be in one in the near future — all signs are pointing to a significant slowdown in the American economy,” said Stephen Miran, who served as a senior official in the Treasury Department under President Donald Trump and is the co-founder of Amberwave Partners, an investment fund. “It’s just a matter of time.”

Yellen said the administration was focused on addressing the ways Americans were feeling the effects of inflation, not on labeling the economy. “We should avoid a semantic battle,” she told reporters.

Still, the Fed’s attempts to solve one economic problem could lead to another. Powell has said that the labor market is unsustainably tight and that the only way to get it back on more stable footing is to cool demand for new hires. The Fed’s economic forecasts also show the unemployment rate rising a bit as interest rates go up. Summers has gone as far as saying the United States needs an unemployment rate of 5 percent over five years to reduce inflation, an analysis Yellen has rejected.

Much of the Fed’s challenge rests in the fact that its main tool is interest rates hikes, which are broad-based and blunt. So far, the Fed has brought rates back up to what’s considered “neutral” — not intended to slow or juice the economy.

“Restoring price stability is just something we have to do,” Powell said recently. “There isn’t an option to fail to do that, because that is the thing that enables you to have a strong labor market over time.”

Some liberal economists and Democratic lawmakers question the Fed’s approach. Yellen said Thursday that more than half of inflation is being caused by supply shocks tied to the war in Ukraine, which drove up the price of food and fuel. Liberal lawmakers say reducing demand — the purpose of higher interest rates — will do little to alleviate inflation caused by supply shortages.

“The president should sign the Inflation Reduction Act into law and then jump in front of Powell before he drives the recovery off a cliff,” said Lindsay Owens, executive director of the Groundwork Collaborative, a left-leaning think tank.

Other economists disagree, saying inflation is still far too high even excluding volatile commodities.

Inside the White House, many officials are resigned to the reality that there may be little they can do about the matter. Biden has promised to protect the Fed’s, in contrast with Trump’s constant independence attempt to harangue the bank into lower rates. There is little reason to believe Biden would criticize Powell for raising rates even if layoffs pick up.

“Certainly, there are people in the White House who are concerned the Fed will overshoot, but in general there’s a Serenity Prayer quality to it,” where Biden aides say there’s little they can do to alter the Fed’s trajectory, said one outside White House adviser, speaking on the condition of anonymity to reflect private conversations with administration officials.

Rachel Siegel contributed to this report.

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