The White House insists the economy is strong as allies grow uncomfortable with the Fed

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

As inflation has soared over the past year, Biden and his senior aides have repeatedly made it clear that they are confident the Federal Reserve could tame the rise in prices with higher interest rates and other monetary policy tools.

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

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The dual threat posed by an economy that is slowing significantly and even struggling with skyrocketing prices has fractured administration allies, with liberal and centrist Democrats increasingly disagreeing that the White House should be alarmed by the actions of the Federal Reserve. Senator Elizabeth Warren (D-Mass.) And many left-wing economists fear that Fed rate hikes could lead to job losses that reverse the gains made under the Biden administration, while others say the White House must step back as the Fed takes drastic measures to reduce searing inflation.

The conflicting impulses reflect a political link that threatens to undermine Biden’s presidency ahead of the upcoming mid-term elections, as huge voter discontent grows over the economy.

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

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Larry Summers, the former Democratic Treasury Secretary who was bitterly critical of the White House stimulus bill last year, retorted, “Our problem is not an overly aggressive Fed; our problem is a Fed that has been too slow to respond to a growing inflation threat … Many on the far left were the main supporters of the “team transition” last year and their views all wrong, as the honest have acknowledged “.

As the debate intensifies, the White House finds itself in the awkward position of trying to allay fears on both sides by saying Powell can still get a “soft landing” that wards off a recession while the central bank also cuts inflation.

On Thursday, Biden repeatedly praised the magnitude of the job gains and economic growth that have occurred under his stewardship. Treasury Secretary Janet L. Yellen also stressed to reporters that the decline in gross domestic product this quarter is due to technical factors, such as a decline in corporate inventories, and that consumer demand remains strong.

“When you look at the economy, job creation continues, household finances remain solid, consumers spend and businesses grow,” said Yellen. Typically, she said, recessions are characterized by large company closures and mass layoffs. “That’s not what we’re seeing right now,” she told reporters.

Citing strong economic data, Biden also said, “It doesn’t look like a recession to me.”

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Biden and Yellen’s comments were part of an all-out push by administration officials this week to challenge the GOP’s claims that the economy is already in recession, noting that the statement has historically fallen on nonpartisan economists of the National Bureau of Economic Research. Many Republicans argued even before the new data was released that two consecutive quarters of economic contraction almost always indicate a recession.

The White House strategy could backfire. Already last year, attempts by Biden advisors to dismiss inflation as “transient” proved to be a failure, as the administration was forced to abandon that message as prices continued to rise. Their attempts to deny a recession could equally backfire if it later materializes, overshadowing the political advantage of even a revolutionary climate and energy deal in the Senate.

“They should have learned from their experience with the word ‘transient’ that sticking too tightly to labels can lead to negative results. Just because we’re not in a recession today doesn’t mean we won’t be there in the foreseeable future – all signs point to a significant slowdown in the US 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 only 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.

However, the Fed’s attempts to solve one economic problem could lead to another. Powell said the job market is unsustainable and the only way to get it back on a more stable footing is to cool the demand for new hires. The Fed’s economic forecasts also show that the unemployment rate rises slightly as interest rates rise. Summers went so far as to argue that the US needs a 5% unemployment rate over five years to reduce inflation, an analysis Yellen dismissed.

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

“Restoring price stability is just something we need to do,” Powell said recently. “There is no option not to, because this is the thing that allows you to have a strong job market over time.”

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

“The president should sign the inflation reduction bill and then jump in front of Powell before he leads the recovery off a cliff,” said Lindsay Owens, executive director of Groundwork Collaborative, a left-wing think tank.

Other economists disagree, stating that inflation is still too high even excluding volatile commodities.

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

“Of course, there are people in the White House who fear the Fed might overrun, but in general there is a prayer quality of serenity,” where Biden aides say there is little they can do to alter the trajectory of the Fed, an outside White House adviser said, speaking on condition of anonymity to reflect private conversations with administration officials.

Rachel Siegel contributed to this report.

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