Republicans Say Spending Is Fueling Inflation. The Fed Chair disagrees.
WASHINGTON — The chair of the Federal Reserve, Jerome H. Powell, has repeatedly undercut a central claim Republicans make as they seek sharp cuts in federal spending: Government spending is driving the nation’s still-hot inflation rate.
Republican lawmakers say spending programs signed into law by President Biden are pumping too much money into the economy and fueling an annual inflation rate that was 6 percent in February — a decline from last year’s highs, but still well above historical norms. Mr. Powell disputed those claims in congressional testimony earlier this month and in a news conference on Wednesday, after the Fed announced it would once again raise interest rates in an effort to bring inflation back toward normal levels.
Asked whether federal tax and spending policies were contributing to price growth, Mr. Powell pointed to a decline in federal spending from the height of the Covid-19 pandemic.
“You have to look at the fiscal impulse from spending,” Mr. Powell said on Wednesday, referring to a measure of how much tax and spending policies are adding or subtracting to economic growth. “Fiscal impulse is actually not what’s driving inflation right now. It was at the beginning perhaps, but that’s not the story right now.”
Instead, Mr. Powell — along with Mr. Biden and his advisers — say rapid price growth is primarily being driven by factors like snarled supply chains, an oil shock following Russia’s invasion of Ukraine and a shift among American consumers from spending money on services like travel and dining out to goods like furniture.
Mr. Powell has also said the low unemployment rate was playing a role: “Some part of the high inflation that we’re experiencing is very likely related to an extremely tight labor market,” he told a House committee earlier this month.
But the Fed chair’s position has not swayed congressional Republicans, who continue to press Mr. Biden to accept sharp spending reductions in exchange for raising the legal limit on how much the federal government can borrow.
“Over the last two years, this administration’s reckless spending and failed economic policies have resulted in continued record inflation, soaring interest rates and an economy in a recessionary tailspin,” Representative Jodey C. Arrington, Republican of Texas and the chairman of the Budget Committee , said at a hearing on Thursday.
Republicans have attacked Mr. Biden over inflation since he took office. They denounced the $1.9 trillion economic aid package he signed into law early in 2021 and warned it would stoke damaging inflation. Mr. Biden’s advisers largely dismissed those warnings. So did Mr. Powell and Fed officials, who were holding interest rates near zero and taking other steps at the time to stoke a faster recovery from the pandemic recession.
Understand Biden’s Budget Proposal
President Biden proposed a $6.8 trillion budget that sought to increase spending on the military and social programs while also reducing future budget deficits.
Economists generally agree that those stimulus efforts — carried out by the Fed, by Mr. Biden and in trillions of dollars of pandemic spending signed by Mr. Trump in 2020 — helped push the inflation rate to its highest level in 40 years last year. But researchers disagree on how large that effect was, and over how to divide the blame between federal government stimulus and Fed stimulus.
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One recent model, from researchers at the Federal Reserve Bank of New York, the University of Maryland and Harvard University, estimates that about a third of the inflation from December 2019 through June 2022 was caused by fiscal stimulus measures.
Much of that stimulus has already made its way through the economy. Spending on pandemic aid to people, businesses and state and local governments fell sharply over the last year, as emergency programs signed into law by Mr. Biden and former President Donald J. Trump expired. The federal budget deficit fell to about $1.4 trillion in the 2022 fiscal year from about $2.8 trillion in 2021.
The Hutchins Center at the Brookings Institution in Washington estimates that in the first quarter of 2021, when Mr. Biden’s economic aid bill delivered direct payments, enhanced unemployment checks and other benefits to millions of Americans, government fiscal policy added 8 percentage points to economic growth. At the end of last year, the Center estimates, declining government spending was actually reducing economic growth by 1 percentage point.
Still, even Biden administration officials say some effects of Mr. Biden’s—and Mr. Trump’s — stimulus bills could still be contributing to higher prices. That’s because Americans didn’t immediately spend all the money they got from the government in 2020 and 2021. They saved some of it, and now, some consumers are drawing on those savings to buy things.
Increased consumer spending from savings could be pushing the cost of goods and services higher, White House economists conceded this week in their annual “Economic Report of the President,” which includes summaries of the past year’s developments in the economy.
“If the drawdown of excess savings, together with current income, boosted aggregate demand, it could have contributed to higher inflation in 2021 and 2022,” the report says.
Some liberal economists contend consumer demand is currently playing little if any role in price growth — placing the blame on supply challenges or on companies taking advantage of their market power and the economic moment to extract higher prices from consumers.
High prices “are not being driven by excess demand, but are actually being driven by things like a supply chain crisis or war in Ukraine or corporate profiteering,” said Rakeen Mabud, chief economist for the Groundwork Collaborative, a liberal policy organization in Washington.
Other economists, though, say Mr. Biden and Congress could help the Fed’s inflation-fighting efforts by doing even more to reduce consumer demand and cool growth, either by raising taxes or reducing spending.
Mr. Biden proposed a budget this month that would cut projected budget deficits by $3 trillion over the next decade, largely by raising taxes on high earners and corporations. Republicans refuse to raise taxes but are pushing for immediate cuts in government spending on health care, antipoverty measures and more, though they have not released a formal budget proposal yet. The Republican-controlled House voted this year to repeal some tax increases. Biden signed into law last year, a move that could add modestly to inflation.
Republican lawmakers have pushed Mr. Powell on whether he would welcome more congressional efforts to reduce the deficit and help bring down inflation. Mr. Powell rebuffed them.
“We take fiscal policy as it comes to our front door, stick it in our model along with a million other things,” he said on Wednesday. “And we have responsibility for price stability. The Federal Reserve has the responsibility for that, and nothing is going to change that.”