This week in Bidenomics: An election tailwind gathers
What a difference one-tenth of a percentage point can make.
Economists expected consumer prices to rise 0.4% from March to April. When the numbers came out on May 15, the actual change was a 0.3% increase, a sign inflation is cooling in the US.
This modest undershoot jazzed the stock market, improved the interest rate outlook, and gave President Biden new hope for an economic tailwind in the home stretch of this year’s presidential election.
Every president takes credit for what is going right, and Biden certainly needs all the help he can get in his reelection battle. Biden's approval rating has been stuck at around 40% for two years, and polls continue to show Republican challenger, four-time indictee Donald Trump, has an edge in key swing states.
Inflation is now running at 3.4% year over year, still far above the Federal Reserve’s target of around 2%. But many economists think things are bound to get back to normal.
Inflation is down sharply from its 9% peak in June 2022. There’s basically no inflation anymore in groceries, appliances, furniture, and other goods, with a few categories — mostly rent, insurance, and restaurant meals — still seeing notable price increases.
In the first three months of 2024, however, inflation seemed to be making an unwelcome comeback. The annualized inflation rate jumped from 3.1% in January to 3.2% in February and 3.5% in March.
That changed the whole outlook for interest rates, stock prices, and everything they affect.
At the start of the year, investors thought the ongoing retreat of inflation would allow the Fed to start cutting interest rates within the first six months of 2024. Lower rates help most consumers and businesses borrowing money, and can be bullish for corporate profits and stock prices.
But worsening inflation put an end to that fantasy. The outlook for rate cuts dimmed, and some analysts thought the Fed might not cut rates at all in 2024. A stock market rally that started last October stalled in April.
Now, the rally is back on.
Stocks surged on the soft April inflation data, with the Dow Jones index hitting 40,000 for the first time. Biden took credit, saying the milestone is “just another example of how President Biden is strengthening our economy.” Eh. Stocks rise because investors are optimistic about corporate profits, not because of any presidential policy, and Biden is not exactly corporate America’s BFF.
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But if current trends hold, the economic stars could align for Biden in the fall when the last unclaimed voters are deciding whether he deserves a second term.
The odds of a Fed rate cut improved following the April inflation data, with the CME’s FedWatch tool now forecasting a 29% chance of a cut by July and a 69% chance of a rate cut by September.
A quarter-point cut in September would get monetary easing started and generate some optimism for future borrowers, even if this cut wouldn't do much to shift the underlying economy.
While the inflation hangover is clearly a risk for Biden, any president running for reelection would welcome a stock market hitting record highs, an economy adding jobs, and a central bank poised to keep the good times rolling. And markets should remain buoyant as long as investors think rate cuts are coming and there’s no unexpected economic shock.
There's another challenge, however, for the Fed and Biden, which is keeping the central bank insulated from charges that it’s trying to help Biden get reelected.
But the Fed might be stuck either way.
If the Fed starts cutting rates in July and cuts again in September, it could establish more market momentum and make the Fed more susceptible to claims of election dabbling. The Fed could also do nothing until after the election — they are set to make a policy announcement the day after Election Day — with this late start possibly making election interference deniability easier.
Powell, for his part, has already had to answer these questions, telling reporters earlier this month "[we] just don't go down that road" when it comes to weighing politics against monetary policy.
And with all this following a one-tenth of a percentage point change, it serves as a reminder over the coming months that small changes in the economic outlook will have big ramifications come November.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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