Republicans and Democrats have dramatically different plans for killing off inflation, but the Fed has the real power

Storm clouds over Capitol Hill in Washington.

Democrats and Republicans have extremely different plans to fight inflation ahead of the midterms.
Dems aim to lower prices through Build Back Better, while the GOP wants a strict spending limit.
Only the Fed holds the key to killing inflation, and neither plan is likely to become law soon.

Democrats and Republicans have ideas on how to tackle inflation, and they couldn’t be more different.

Prices are still ripping higher throughout the US economy. The Consumer Price Index — among the country’s most closely watched inflation gauges — showed inflation hitting a 7% year-over-year rate in December, the fastest pace since 1982. While some signs point to inflation peaking, price growth is expected to stay elevated throughout 2022, all but ensuring it will be a hot topic for the 2022 midterm elections.

As with most things, the two major parties are sharply split on how to solve the problem. Democrats see new spending as the best way to curb inflation, while the GOP is pushing for a strict cap on all future spending. Whether they can achieve their goals — or get their plans to the president’s desk at all — is a different story. And regardless of what Congress wants or does, the Federal Reserve holds the real key to fighting inflation.

President Joe Biden has approved trillions of dollars in new spending between his March stimulus package and the recent bipartisan infrastructure plan. But instead of pulling back on the spending spree amid historic inflation, the president is doubling down.

Biden framed his Build Back Better plan as Democrats’ inflation killer in a January 19 press conference, saying the proposal would “address the biggest costs that working families face every day.” He cited a letter from 17 Nobel Prize-winning economists who said the plan would “ease longer-term inflationary pressures.” By spending on childcare, prescription drugs, and energy costs, BBB could help Americans pay less on key goods and services, Biden argued.

The proposal could be effective, but probably not quickly enough, said Maya MacGuineas, the president of the nonprofit Committee for a Responsible Federal Budget. “If you are able to increase supply and productive capacity, that wouldn’t help inflation,” she said, adding that it could take years for the bill’s effects to be felt.

Some Senate Republicans, meanwhile, have a plan to hamper inflation for good. A bill introduced by Sen. Tim Scott of South Carolina on January 12 aims to ban government spending that’s estimated to lift inflation above a 4.5% year-over-year rate. The measure would use estimates from the Congressional Budget Office of a bill’s effect on the Consumer Price Index. Though the proposal has only been introduced, it boasts 12 cosponsors and represents the GOP’s latest plan to strike down Biden’s ambitious spending plans.

Neither plan is likely to become law anytime soon

For starters, neither proposal has its respective party’s unanimous backing. Sen. Joe Manchin of West Virginia has been a steadfast roadblock for BBB for months, arguing that Democrats shouldn’t pass another huge spending package until inflation dies down. He recently told Insider‘s Joseph Zeballos-Roig that his negotiations with the White House over the plan would be “starting from scratch” later in 2022, which would further delay Democrats’ plan to fight inflation.

Democrats aren’t the only ones with disagreement within their ranks. Sen. John Kennedy of Louisiana recently pushed back against the GOP’s Inflation Prevention Act, telling Insider on January 19 that the bill wouldn’t do enough to pull inflation back to comfortable levels.

He said of the proposal that you can’t cap inflation, “you’ve got to kill it.” He added, “The ideal situation is to have companies profitable, wages going up, but no inflation, and that is possible.”

The 50/50 split in the Senate, in which Democratic Vice President Kamala Harris holds the tiebreaking vote, also stands in the way of the GOP proposal, to say nothing of an inevitable Biden veto. Still, the legislation hints at how Republicans could fight price growth should they sweep the midterm elections.

Inflation is mostly in the hands of the Fed now anyway

And for all the discussion both parties are poised to have around inflation, neither has the silver bullet to cool price growth. The Fed is the only authority that can raise interest rates, which is historically the most effective way to rein in price growth.

“Inflation is the hot topic, and everybody wants to come up with a solution,” MacGuineas said. “But the fact is, this primarily falls to the Fed to be addressed.”

Several signs point to the central bank starting its hiking cycle in March. Fed Chair Jerome Powell offered the clearest hint yet on Wednesday when he said the Federal Open Market Committee was “of a mind to raise the federal funds rate at the March meeting” as long as conditions were right.

Yet the Fed acts independently of Congress and the White House, so it theoretically won’t adjust its policy for political reasons. That leaves lawmakers on both sides of the aisle in an awkward spot. Neither party can push the Fed to use its proven inflation-killing tool, but both want the credit for killing inflation. For now, the most they can do is try to coordinate with the central bank, and some are already looking to do just that.

“We know the Fed is going to do something,” Kennedy told Insider. “I would like to be able to sit down with the Fed and say, ‘Is there something we could do?'”

Read the original article on Business Insider

Economy, Markets, Politics, Economy, Inflation, Democrats, Republicans, Biden spending plans, Build Back Better, price growth, 2022 midterms, 2022 elections

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