Manchin Turns Out To Be the Only Adult in the Room

Most would agree that the central bank is entering a perilous phase; no one can remember a time when the Fed succeeded in pulling off a ‘soft landing.’

AP/J. Scott Applewhite, pool
Senator Manchin at the Capitol on March 1, 2022. AP/J. Scott Applewhite, pool

Markets rose after Jay Powell finally emerged from his politically-induced coma and announced the Federal Reserve would raise interest rates by 25 basis points, with several more hikes to follow. He also told investors he would likely begin shrinking the Fed’s $9 trillion balance sheet as early as May.

Traders, it seems, welcomed certainty over the muddle that has been Fed policy for many months. Yet, most would agree that the central bank is entering a perilous phase; no one can remember a time when the Fed succeeded in pulling off a “soft landing.”  

The yield curve is flattening, sentiment souring and forecasts of growth — including from the Fed — heading south. Many expect a recession in 2023. How did we get here? How did inflation deflate a healthy recovery?

President Biden has blamed Covid-induced worker shortages, supply chain issues, greedy companies, and Vladimir Putin for spiraling prices that are eating into Americans’ paychecks and trashing his approval ratings. Voters blame Mr. Biden, and investors point the finger at Chairman Powell.

Let us not forget, though, what undermined our country’s healthy bounce-back from the sharp but short-lived downturn in 2020. To do so would be to let economic miscreants off the hook and invite a repeat down the road.

The problems started when Mr. Biden and his party, emboldened by their 2020 victories, went on a partisan and unnecessary spending spree. In 2021, even as growth was accelerating, they passed their $1.9 trillion American Rescue Plan, stuffed full of handouts to Big Labor and other Democrat-aligned special interests. 

Not a single Republican voted for the bill, which came just three months after Congress passed a $900 billion stimulus package. That brought total Covid relief spending to $5.4 trillion, more than was spent fighting World War II.

One person who has largely avoided the blame game is Secretary Yellen at the Treasury Department. Yet, Mrs. Yellen shilled for Mr. Biden’s reckless spending programs even as price increases accelerated, the economy took off and inflation took root.  

Unhappily, Mrs. Yellen seems to think her responsibility ends with deflecting it to Fed Chairman Jay Powell, as she has done on several occasions.  

Here’s what she told CNBC in February 2021, as Democrats moved to pass the ARP: “Inflation has been very low for over a decade, and you know it’s a risk, but it’s a risk that the Federal Reserve and others have tools to address.” 

At the time, the Atlanta Fed tracker showed GDP growing at close to 10 percent. A report showed retail sales for the prior month had just risen at four times the consensus estimate and unemployment was falling fast. Clearly, the economy was surging. 

As Democrats scurried to pass the ARP, a former treasury secretary, Lawrence Summers, wrote an op-ed outlining several reasons that the huge bill was risky. He compared it to President Obama’s $800 billion stimulus, which filled about half of what he calls the “output gap” caused by the great recession; by comparison,  Mr. Biden’s proposed spending furnished three times the shortfall in economic activity. In other words, way more, and way too much.

Secretary Summers also noted that “monetary conditions are far looser today than in 2009…”  and pointed out that consumers were sitting on excess savings of roughly $1.5 trillion that would fuel spending as the country reopened. 

By May, Mrs. Yellen was singing a different song. Mr. Biden was pushing more multi-trillion-dollar adventures, precursors to his Build Back Better program, raising more red flags about likely inflation. 

Mrs. Yellen caused a brief stock market meltdown when she admitted that, “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat…” It was her first hint that Democrats were going overboard. 

Just recently, Mrs. Yellen caused another kerfuffle when she proclaimed on CNBC that, “We’re likely to see another year in which 12-month inflation numbers remain very uncomfortably high.” Her comments came on the heels of the Labor Department report showing consumer prices rose 7.9 percent in February from the year before, the fastest rate in 40 years and, yes, uncomfortably high. 

Second-guessing is easy sport and given the extraordinary uncertainties of recent years, may be unfair. Yet Secretary Yellen, just like Chairman Powell, utterly missed the boat on the dangers of excessive spending as well as signs the economy was overheating, and has now brought us to the edge of a downturn. 

Senator Manchin, who has balked at more federal spending, turns out to be the lone adult in the room.

The New York Sun

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