Fed Meeting Holds High Stakes for Biden


WASHINGTON — The Federal Reserve’s decision on Wednesday on whether to raise rates at a precarious moment carries risks not just for the central bank, but also for President Biden.

Mr. Biden was already relying on the Fed to maintain a delicate balance with its interest rate decisions, simultaneously taming rapid price growth while avoiding plunging the economy into recession. Now, he also needs the Fed chair, Jerome H. Powell, and his colleagues to avert a misstep that could hasten a full-blown financial crisis.

Economists and investors are watching Wednesday’s decision closely, after the Fed and the administration intervened this month to shore up a suddenly shaky regional banking system following the failures of Silicon Valley Bank and Signature Bank. So are administration officials, who publicly express support for Mr. Powell but, in some cases, have privately clashed with Fed officials over bank regulation and supervision in the midst of their joint financial rescue efforts.

Forecasters generally expect Fed officials to continue their monthslong march of rate increases, in an effort to cool an inflation rate that is still far too hot for the Fed’s liking. But they expect policymakers to raise rates by only a quarter of a percentage point, to just above 4.75 percent — a smaller move than markets were pricing in before the bank troubles began.

Some economists and former Fed officials have urged Mr. Powell and his colleagues to continue raising rates unabated, in order to project confidence in the system. Others have called on the Fed to pause its efforts, at least temporarily, to avoid dealing further losses to financial institutions holding large amounts of government bonds and other assets that have lost value amid the rapid rate increases of the past year.

“Under the currently unsettled circumstances, the stakes are high,” Hung Tran, a former deputy director of the International Monetary Fund who is now at the Atlantic Council’s GeoEconomics Center, wrote in a blog post this week.

“Disappointing market expectations could usher in additional sell-offs in financial markets, especially of bank shares and bonds, possibly requiring more bailouts,” he wrote. “On the other hand, the Fed needs also to communicate its intention to bring inflation back to its target in the medium term — a difficult but not impossible thing to do.”

Mr. Biden has for nearly a year professed his belief that the Fed could engineer a so-called soft landing as it raises interest rates, slowing the pace of job creation and bringing down inflation but not pushing the economy into recession. That would complete what the president frequently calls a transition to “steady and more stable growth.”

It would also help Mr. Biden as he gears up for a widely expected announcement that he will seek re-election: History suggests that the president would be buoyed by an economy with low unemployment and historically normal levels of inflation in 2024.


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Through the beginning of the year, data suggested a soft landing could be in the works. But in recent months, price growth has picked up again. The economy continues to create jobs at a much faster pace than Mr. Biden said last year would be consistent with more stable growth. Fed officials were eyeing a more aggressive inflation-fighting stance before the banking crisis hit.

Mr. Powell suggested in congressional testimony this month that the Fed could raise rates by as much as half a percentage point in the two-day meeting that ends on Wednesday. Days later, Silicon Valley Bank failed, followed by Signature Bank. The Fed, the Treasury Department and the Federal Deposit Insurance Corporation announced emergency measures to ensure that the banks’ depositors would have access to all their money, and that other regional banks could borrow from the Fed to prevent the rapid flight of deposits that had doomed Silicon Valley Bank.

Mr. Biden will need further cooperation from Fed officials if more bank failures, or other events, threaten a full-scale financial crisis. Republicans control the House and appear unwilling to sign on for a potentially large government rescue of the financial system, like the bipartisan bank bailouts during the 2008 financial crisis.

“It’s especially important when you can’t count on Congress,” said Jason Furman, a Harvard economist who led the White House Council of Economic Advisers under President Barack Obama. “We’re going to see the only game in town when it comes to financial stability is the White House and the Fed.”

Administration officials have publicly lauded Mr. Powell since the Silicon Valley Bank failure. Karine Jean-Pierre, the White House press secretary, told reporters this week that there was no risk to Mr. Powell’s position as Fed chair from his handling of financial regulation.

“The president has confidence in Jerome Powell,” she said.

Ms. Jean-Pierre also reiterated the administration’s longstanding refusal to comment on Fed interest rate decisions. “They are independent,” she said, adding: “And they are going to make their decision — their monetary policy decision, as it relates to the interest rate, as it relates to dealing with inflation, which are clearly both connected. But I’m just not going to — we’re not going to comment on that from here.”

There is wide debate on what interest rate announcement Mr. Biden should be hoping to hear on Wednesday afternoon.

Some economists and commentators have pushed the Fed to hold off on raising rates entirely, contending that another increase risks further rattling the banking system — and consumers’ confidence in it.

Liberal senators like Elizabeth Warren, Democrat of Massachusetts, and progressive groups in Washington have urged the same for months but for a far different reason. They argue that continued rate increases could slam the brakes on economic growth and throw millions of Americans out of work, and they say the real drivers of inflation are corporate profiteering and snarled supply chains, which will not be tamed by higher borrowing costs.

“I don’t think the Fed should be touching interest rate hikes with a 15-foot pole,” said Rakeen Mabud, the chief economist at the Groundwork Collaborative, a liberal policy group in Washington.

“Tanking our labor market is not the way to a healthy economy, is not the way to stable prices,” Ms. Mabud said. “We have an additional imperative this month, which is that aggressive interest rate hikes are exactly what have created some of the instability that we’re seeing” in the financial system.

Other economists, including some Democrats, have urged the Fed to raise rates even more swiftly to beat back inflation as soon as possible.

“The whole reason we have independent central banks is so they think about things on a longer time horizon than the typical White House is able to,” Mr. Furman said. “So I think the Fed, insofar as it did anything to hurt Biden, it was that it raised rates too slowly.”



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