With the U.S. government saying this week that inflation has reached a four-decade high and the Fed is stepping up its efforts to cut prices, President Joe Biden’s economy is facing a dizzying set of risks. Growth was already expected to slow this year after a sharp rise of 5.7 percent in 2021 as both Congress and the central bank cancel support for the economy. But hits continue to go – rising energy prices, a slowdown in China and the possibility of a recession caused by the Fed.

Here are the big challenges ahead.

Fed as “bobsleigh driver”

The biggest threat to the economy is the central bank’s interest rate-raising campaign to cut costs and curb inflation. But it does mean the Fed will slow growth, and it will have implications for American workers.

The job market is booming, adding an average of 600,000 jobs a month over the past six months, and as wages rise more people are returning to the workforce. This, combined with the fact that there are more vacancies than workers, has raised hopes that the Fed can reduce demand for workers without leading to rising unemployment. But the harder the Fed pushes the brakes to stop inflation, the greater the collateral damage. And the central bank has often caused recessions in past episodes of fighting inflation.

“The only thing a bobsled driver can do is push him,” said William Springs, a professor at Howard University and chief economist at AFL-CIO. “If for some reason you can’t handle bobsleigh, that’s all. You’re just stuck on the ice. “

The Fed is committed to the so-called soft landing, which means it will slow down the economy while avoiding a recession. And economic forecasters at some of the world’s largest banks – Deutsche Bank, UBS and Bank of America – said the 8.5 percent surge in inflation in March could be the worst of the price spikes, in part because the central bank is intervening.

But success is far from guaranteed. Reducing inflation while maintaining job growth is an “impossible combination, but it will require skills as well as luck,” said Ellen, herself a former Fed chief, during a speech to the Atlantic Council.

Businesses have also accumulated high levels of debt, and when the Fed raises interest rates, that debt goes up, which can really sting some companies. These fears played out in the stock market, where investors were trying to assess which firms to bet on in the long run.

“There are a lot more corporate levers of influence now,” said Megan Green, a senior fellow at Harvard Kennedy School and chief economist at the Kroll Institute. “It’s good as long as the stakes are low and the profits are high, and to be fair, the companies have given birth to their monetary positions.”

“But if the Fed rises to 3 percent by the end of the year, as some predict, it will cause some defaults and cause some pain in the economy,” she added.

Supply chain problems that Powell can’t fix

Inflation felt by the U.S., the highest since the first Reagan White House, was fueled by global delays in production and delivery when the pandemic closed factories and led to labor shortages. But it is unclear if this will improve, which means inflation may remain stubbornly high for some time.

This, in turn, will put pressure on the Fed to do more to fight inflation, even if its instruments cannot eliminate supply problems, but only on the demand side. Fed Chairman Jerome Powell said in a speech last month that he was optimistic about starting to ease these bottlenecks this year, helping the central bank balance the mismatch between supply and demand, but he acknowledged he could not count on it.

“It still seems likely that the expected cure from the supply side will come in time, when the world will eventually come to some new norm, but the timing and scope of this assistance is very uncertain,” Powell said.

Military consequences: “How big the tax increase”

Energy prices have risen sharply since Russia’s invasion, a phenomenon that is affecting the entire world economy. As oil prices rise, so do transportation costs. Higher oil and gas prices may increase the cost of energy-intensive components such as steel, cement and plastics used in various industries.

“It’s like a big tax increase,” said Joseph Gagnon, a macroeconomist at the Peterson Institute for International Economics. “People need to heat their houses, the factory needs energy to work. This means that you have less money for non-energy things, which means that some people do not work. “

Gagnon said the U.S. is in a better position than Europe because it is actually an oil exporter, which means the U.S. economy will get some compensatory benefits from rising oil prices. But “those who lose are going to cut other costs faster than those who earn will spend them.”

The conflict in Ukraine is complicating supply chains as production has begun to see some improvements in labor as many people rejoin the workforce.

“Russia’s invasion is likely to be a blow to global growth, and for all those countries that are already suffering from food security, it’s just a huge concern,” said Ellen.

The Chinese factor

European Central Bank President Christine Lagarde also warned that the war in Ukraine posed significant threats to Europe’s growth – worsening sentiment and fueling inflation, which was also unusually high on the continent. Meanwhile, China’s economy is slowing, a dynamic that will only intensify amid renewed blockages due to the latest version of the coronavirus.

For the US, this means less interest abroad in its exports. It is unlikely to cause a recession per se, but this is another reason why growth is slowing, making the economy much more fragile to external shocks.

“If the EU enters a recession or equilibrium, it will linger in demand,” Green said. “In general, the picture of external demand in the United States does not look very good. You have to wonder what will be the engine of growth. “

Ambush financial risks

Then there is always the danger that something unexpected will break. By the end of last year, U.S. business debt had grown to $ 18.5 trillion, up more than $ 2 trillion from the end of 2019, when corporate borrowing was already historically high. according to the Fed. As interest rates rise, this debt will rise in price and could lead to defaults, cascading spreads across the financial system. Meanwhile, during the pandemic, risky investments increased – from cryptocurrencies to front companies known as SPAC. If some of the bubbles burst, it can cause pain, even if it does not lead to an economic downturn.

JPMorgan Chase CEO Jamie Diamond said on Wednesday that he remained optimistic about the economy in the short term, but warned of “significant geopolitical and economic challenges ahead”.

“I do not predict a recession,” Daiman, who runs the largest US bank, told reporters. “But is it possible? Absolutely. ”

https://www.politico.com/news/2022/04/13/biden-booming-economy-big-risks-00023234

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