Political | Process

Joe Biden and Democrats will likely be dealing with the fallout from high inflation throughout the year, a prospect that bodes poorly for Democratic prospects for the midterm elections.

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• Inflation has soared. Consumer prices grew 7% in the 12 months ending in December, the fastest pace since 1982. Because of the inflation, the Federal Reserve is gearing up to hike interest rates several times this year and appears on track to be even more hawkish in its 2022 monetary policy than was thought even just weeks ago.

• The high inflation has provided Republicans the opportunity to bash Democrats for spending so much during Biden’s first term.

• But even if the rate hikes succeed in driving down prices before November, the administration might have to deal with the deleterious economic effects that rising rates bring in the run-up to the election.

• Desmond Lachman, a senior fellow at the American Enterprise Institute, noted that the mere mention of increased interest rates can spook the markets.

• He said the administration is facing two problems: The first is that inflation is running too hot, and the second is that there are bubbles destined to burst that have been fed by interest rates being so low for so long.

• Regarding the housing market, Lachman said even adjusting for inflation, prices are higher than they were at the peak of the housing bubble in 2006.

• The Fed can’t keep interest rates at their current level because inflation is so high, but when the central bank starts hiking those rates, housing prices and the prices of other assets could tumble, he argued.

• “So if the Fed doesn’t raise the interest rates, then we’re going to have an inflation problem, but if the Fed raises the interest rates, we might not have an inflation problem but then we’ve got a recession,” Lachman told.

• The prospect of either sticky inflation or a noticeable economic downturn is not a favorable prospect for Democrats, who have been polling below Republicans and hold only slim margins in the House and Senate.

• According to the Fed itself, the notion of rising interest rates causing a major economic downturn is not likely.

SOURCE: WASHINGTONEXAMINER