This Trump Appointee May Hold Key to Biden's Reelection Bid

Jerome Powell, who was appointed as chair of the Federal Reserve in 2017 by then president Donald Trump, might hold the key to the future of the U.S. economy, experts have told Newsweek—and with it, the future of President Joe Biden's campaign for reelection next year.

Powell has recently signaled that the central bank might once again raise its key interest rate in an attempt to bring down inflation, which, at around 3 percent is much lower than the peak of 8.5 percent last year, but remains above the Fed's goal of 2 percent.

Meanwhile, the Biden administration is taking credit for the country's strong economy. In a recent op-ed in The Washington Post, the president wrote that "Bidenomics"—which reflects his economic vision for the country—is working.

"Because of the major laws and executive orders I've signed—from the American Rescue Plan, the bipartisan infrastructure law, the Chips and Science Act, the Inflation Reduction Act (IRA), my executive orders on racial equity and more—we're advancing equity in everything we do, making unprecedented investments in all of America, including for Black Americans," Biden wrote.

However, the Fed appears to disagree, despite the resilience shown by the U.S. economy, driven by continued growth since the end of the pandemic, which has so far assuaged fears of an approaching recession. While Powell is not the only person making decisions at the Fed, he is the most important voice within the institution.

Commenting on Powell's apparent intention to hike rates again, Robert Reich said: "Remember: Raising rates puts the burden of fighting inflation mostly on middle-class and low-wage workers and does nothing to address corporate price gouging."

Newsweek columnist Reich was the secretary of labor under Bill Clinton and is the chancellor's professor of public policy at the University of California Berkeley.

Macroeconomist Dean Baker, co-founder of the Center for Economic and Policy Research, told Newsweek that neither the Fed's rate hikes nor Biden's IRA had much of an impact on inflation, which dropped mostly because of the "reversal of the supply chain problems that sent prices soaring in 2021 and the first half of 2022."

"The Federal Reserve's aggressive rate hikes since early 2022 have contributed to the slowing in inflation, while the Inflation Reduction Act is only now being implemented," Mark Zandi, chief economist of Moody's Analytics, told Newsweek.

"But far and away the most important reason for the slowing in inflation is the fading fallout from the pandemic on supply chains and labor markets and Russian War in Ukraine on oil, food and other commodity prices."

Even though both initiatives helped relatively little, "we have seen inflation come down close to the Fed's target," Baker added.

"It (the Fed) should have the luxury of sitting back and seeing where the inflation rate settles. This would be a huge victory, although we can argue over how much credit it deserves, or whether the drop in inflation was inevitable," he told Newsweek.

Further rate hikes by the Fed "would increase the risk of a hard landing" for the U.S. economy, Baker said. "I am hoping they don't—I can't see a reason for it—but I had overestimated the impact of past rate hikes, so perhaps that would be the case again."

In a recent conversation between Greg Ip, chief economics commentator at The Wall Street Journal, and former federal prosecutor Preet Bharara, the pair also said that the possibility of a recession in the U.S. will depend on the Fed continuing to hike interest rates.

"A lot of the prospects of going into a recession now are really based on how successful the Fed is in getting inflation down without having to raise rates to such a level that causes that sort of a recession," Ip said during a podcast recording.

According to Ip, the Fed is likely to continue with its aggressive campaign of raising rates. "I see an economy that still seems to be kind of stuck in a mode of thinking that inflation is here to stay. And the Federal Reserve will not be happy with that," he said.

"And unfortunately, that tilts the odds towards the Fed keeping interest rates as high as they are now and possibly even higher and eventually weakening the economy enough to produce something that looks like a recession."

This could negatively impact Biden's chances of reelection during the presidential race next year as, according to Ip, what will influence voters most is what happens with inflation.

"I think that if the president gets lucky, we'll have inflation continuing to move down lower next year without a recession," Ip told Bharara, adding that this "soft landing" is "more in the hands of the Federal Reserve than it is in the hands of the president."

"The Fed will play a critical role in determining whether the U.S. suffers a recession in 2024," Zandi said.

"Policymakers must raise rates high enough, long enough to slow growth and quell inflation, but not so high, so long that it undermines the economy. We are close to the moment of truth on whether the Fed will successfully thread this needle," he added.

"My view is the Fed will be able to pull this off, but the bigger risk is that policymakers unnecessarily raise rates too high for too long, as they appear more fearful that inflation will become entrenched than the economy will suffer a downturn."

Kitty Richards, acting executive director at economic policy think tank the Groundwork Collaborative and a former Biden Treasury official, told Newsweek in a written statement that she is optimistic about the impact of Biden's initiatives on the U.S. economy.

"Despite the Fed's misguided interest-rate hikes, last quarter saw falling inflation and rising wages, as workers organized and fought for better pay and working conditions," she said.

"Today's corporate profits data shows that there's plenty of room for prices to fall and wages to rise further, but only if corporations are forced to invest in production and pay their workers fairly instead of extracting record profits."

Crucially, Republicans are not happy with Powell's decision to raise rates. Trump recently told Fox Business Network that, if he wins in 2024, he will not reappoint him as the central bank's chair.

Update 9/1/23 7:15 a.m. ET: This article was updated to include comments from Moody's Analytics' Mark Zandi.