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June 8, 2022, 1:02 p.m. EDT

As Biden fights inflation, economists warn his weapons for this battle look ‘extremely limited’

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By Victor Reklaitis

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When asked by MarketWatch about Biden’s limited ability to tackle inflation, a top White House economist said the question goes to the fact that it’s the Federal Reserve’s job to ensure price stability and full employment.

“So first and foremost, the president and his entire administration respect the independence of the Fed, and also understand that this is largely their mandate — to address inflation,” said Cecilia Rouse, who chairs Biden’s Council of Economic Advisers.

It’s important that Congress has been confirming Biden’s Fed nominees, “so that the Federal Reserve is fully staffed and ready to take on this challenge,” she added.

“We support the policy changes that they’re making in order to address inflation. That said, the president is doing what he can as well,” Rouse also said, with her remarks coming Friday at the end of a panel discussion hosted by the Center for American Progress, a liberal think tank. She pointed to steps such as the release of oil reserves and allowing the summertime sale of E15 gas.

Analysts have been predicting defeats for Biden’s Democratic Party in November’s midterm elections if high prices persist.

Republicans are widely expected to regain control of the U.S. House of Representatives in those elections, with betting market  PredictIt giving an 88% chance  for that outcome. The GOP is getting good odds for taking back the 50-50 Senate, too, as  PredictIt puts them at 77% .

Democratic lawmakers have joined Biden in working to address inflation ahead of the midterms, with the House last month narrowly approving a bill aimed at alleged “price gouging” at gas pumps.

“We view this as the latest messaging bill designed more to show that Democrats are fighting inflation than to become law. The fact that Democrats struggled to pass even low-impact legislation that mirrors existing law in a majority of states highlights the challenges in addressing fuel prices,” said Benjamin Salisbury, director of research at Height Capital Markets, in a note.

What’s next

Republicans have frequently criticized Biden over high inflation and charge that the $1.9 trillion stimulus package that he signed into law last year has contributed to high prices, with Senate Minority Leader Mitch McConnell saying in a recent floor speech that it’s “directly responsible for as much as 3 percentage points of our current inflation.”

The Economic Outlook Group’s Baumohl argued that the American Rescue Plan probably has done more good than harm by helping the U.S. economy bounce back, and he said it would be hard for Republicans to come up with a strategy that would bring inflation down quickly.

“They might be willing to deregulate more of the energy industry /zigman2/quotes/206420077/composite XLE +0.76% ,” he said. “But that’s not going to be the solution, because that’s going to take time, in any event, for refiners to build more refineries — nor do I think that they’re willing to do so because they can see the future, and they know that that renewables and sustainability is the path for a lot of private capital spending.”

His firm sees inflation coming down to about 4% by the end of the year, with that forecast assuming no more major COVID outbreaks in the U.S. and Europe, along with Russian President Vladimir Putin ending his war on Ukraine this summer, because of the conflict’s toll on Russia’s military and economy.

Baumohl also stressed that the private sector is addressing inflation regardless of what Washington is trying.

“Every company in every industry is right now exploring ways with which to come up with a new strategy that will help them deal with what seems to be a changing economic and business landscape,” he said.

“There’s a lot that’s going on the economy right now on its own in dealing with inflation, and that to me is the real untold story.”

RSM’s Brusuelas cautioned that food prices are “going to be the real problem later this summer into fall, even as top-line inflation is coming down.” That’s because of sanctions on Russian grains and Moscow’s blockades of Ukraine’s wheat harvests.

“Patience is what the public is going to have to have, in terms of waiting for prices to return back to earth,” he said, adding that he sees the Fed getting the U.S. back to its long-term target of 2% inflation over the next two or three years.

One other step that Biden could take is cutting Trump-era tariffs on Chinese goods. He said last month that he was considering such a move , as U.S. inflation runs at its hottest pace in 40 years.

U.S. stocks /zigman2/quotes/210598065/realtime DJIA +1.27% /zigman2/quotes/210598365/realtime COMP +2.09% have tumbled this year, with the S&P 500 /zigman2/quotes/210599714/realtime SPX +1.73% down about 13%, as investors fret about inflation, the Fed’s rate hikes and the potential for a recession .

Now read: Mitt Romney, Elizabeth Warren, other senators send bipartisan letter to Biden urging him to keep Trump’s China tariffs, saying they’re ‘not a driver of today’s inflation’

Plus: Biden adviser says U.S. still would face ‘record high inflation’ if there hadn’t been a $2 trillion spending package — and there would be ‘much higher unemployment’

This is an updated version of a report that was first published on May 24, 2022.

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