Plus, how the Fed’s interest rate hike could help the U.S. avert a recession.
Amid a summer of record-high gas prices and inflation that’s climbing to new heights, many Americans are struggling just to make ends meet — and it’s starting to take a toll. Nearly 40 percent of consumers don’t have any money set aside for emergencies like a hospital visit, according to a recent analysis by the American Consumer Credit Counseling.
So we turned to Cecilia Rouse, the chair of the Council of Economic Advisers, an agency within the executive branch that’s charged with offering economic advice on the formulation of both domestic and international policy. When President Biden nominated Rouse in 2020, she became the first African American to hold the position.
What’s her take on our current moment? Despite nationwide concerns about sliding into another recession, Rouse expressed confidence that the U.S. can meet these challenges head-on, and she believes the economy remains resilient based on measures like promising job growth.
“These headwinds are real — we are not kidding ourselves,” Rouse told KCM. “But what I think is important for people to understand is that the U.S. goes into these headwinds from a stronger position than most other countries.”
Her comments come amid yet another update to our fiscal outlook. On Wednesday, the Federal Reserve raised interest rates by 0.75 percent for the second time, matching a historic hike in June. On top of its direct impact on what banks charge each other for short-term loans, this uptick will also have a trickle-down effect on some consumer products, such as adjustable mortgages, auto loans, and credit cards.
To better understand where the U.S. economy is and where it’s headed, we asked Rouse about efforts to control gas prices and inflation as Americans feel the pinch.
KCM: Though gas prices have dropped from record highs in June, can we expect them to come down any further in the near future?
Cecilia Rouse: Ever since Russia invaded Ukraine, we’ve seen an acceleration in gasoline prices, and the most recent peak happened about mid-June. We’ve now had forty-three straight days of decreases. So they’ve come down about 14 percent since the peak in June, and that’s definitely a welcome sign.
Part of that is because we’ve got more oil on the market. For example, the president has been releasing barrels from the strategic petroleum reserve. Forecasters are expecting that over the next couple of weeks, we will continue to see gas prices decline, but it’s very hard to look much further than that. This is a market that’s actively traded. It is heavily impacted by Russia’s work in Ukraine, and it’s created on a global market.
So while we can expect further relief, the president is still urging Congress to pass a gasoline tax holiday. He’s also encouraging states to do the same, so we need to stay vigilant. But for the first for the next couple of weeks, we can expect to see some further relief.
What about efforts to increase oil production — and how does that impact our climate goals?
A challenge with oil production is that it’s not just turning off and on a switch. It can take some time to actually develop the production. That said, oil producers have been able to increase production in the last couple of months, and they have plants to continue doing so. Many of them are likely to report record profits this quarter as well, and the president is urging them to take those profits. It’s a signal that what you’re doing is profitable, and to invest in it to increase production. So that would increase production over the coming months as we make a transition to clean energy. But we know that is going to take investment as well, and we ask those oils producers to increase production to meet the demands of today’s economy.
Speaking of the economy, we have the Fed’s latest rate hike. Will this help get high inflation under control?
The Federal Reserve has a dual mandate of maintaining inflation: Maintaining price stability and maximum employment. And right now, we have a very strong labor market: Unemployment at the last reading was 3.6 percent. We will get a new reading at the end of next week for July. But inflation is unacceptably high, so the Federal Reserve is the main attempt to address inflation.
Chairman [Jerome] Powell has said he is going to work to reduce inflation, and he will. President Biden is giving him the leeway to do so. They’ve been increasing interest rates. What that does is increase the cost of borrowing. We can already see that moves that they’ve made so far have increased the mortgage interest rate, and we can already see that that’s generating a bit of cooling off in the housing market. That’s a welcome development. So the Federal Reserve will get inflation under control, and hopefully, they can do so without costing too much in terms of the labor market.
What makes the economic data so hard to interpret right now?
On the one hand, we have what looks to be a very robust economy. We have an almost historically low unemployment rate. We’ve had job growth in the last quarter. The U.S. economy created 1.1 million jobs. So we’ve got a red hot labor market. We continue to see increases in industrial production. We see industrial production robust, and we see that the dollar is strong, which reflects the fact that our economy is stronger than our neighboring economy. We see that consumers continue to spend and businesses continue to invest, so we see a lot of economic activity.
At the same time, we also have very high inflation. We are coming out of a pandemic, but we have this new variant, which is very transmissible. The number of cases is very high. Obviously, we have vaccines, we have effective therapies, which means that the impact in terms of death is not nearly as devastating as it was two years ago, but it’s not zero. And when people get sick, they can be out of the labor market, and they may have to stay at home for five to 10 days.
We have China, which is still imposing lockdowns as a way of addressing Covid. For many producers who are constructing things, China’s a big part of their supply chains and their production can be hobbled, so we’re not through the pandemic. We have Russia’s war against Ukraine, which causes a lot of uncertainty. But on the other hand, we have a very strong labor market. Consumers still have money to spend even accounting for inflation and we see a lot of robust activity.
As you know, the World Health Organization just declared monkeypox a global emergency. How does that impact economic recovery on top of the Covid-19 pandemic?
What makes a pandemic a challenge, especially with diseases that are communicable, is that one person’s actions affect another. And since we’re a global economy, what may start in one country does not stay in that country, which means we need to be acting together. We need to address these challenges when they start, so that’s why there’s a big effort to get ahead of monkeypox. Maybe it’s already too late, but we need to be much more aggressive much earlier so that we don’t have the massive disruption to our economic systems as a way to address it.
The good news is we’re on it. The good news is there are therapeutics and there are vaccines against monkeypox, but we do need to wake up and recognize that this needs to be addressed sooner rather than later.
We also have climate change. That’s another threat to our economic systems. It’s becoming increasingly costly not to address climate change. It disrupts our economic order. People ask about where our food challenges are coming from. Some of it is war against Ukraine. Some of it is drought, high temperatures, and some of the other changes that are happening as a result of our changing climate. So we need to be addressing climate change and many of these global challenges because they’re also economic challenges.
A lot of these global challenges are affecting everyday Americans in very real ways. Studies have found that people are putting less money aside for emergencies and long-term financial goals. What are some ways to provide relief in the meantime?
President Biden campaigned on, was elected for, and has been executing an economic plan designed for working Americans. It has been designed for the average American. So his plan has been to address some longstanding challenges in our economy. We haven’t made major investments in our infrastructure for over 30 years. Our ports were not the best in the world. We know we had potholes. We know we had delayed investments we needed to make there. And yet, if you don’t have robust infrastructure, you can’t have an increasing economic system. So the bipartisan infrastructure law was passed.
We also have to be investing in our people. We know that if you have to choose between taking care of a loved one and going to work, that’s a really difficult decision. So he wants to make investments in childcare. That was part of his initial plan. Congress hasn’t gone along with that. He will keep fighting for that, but we know we have to make it easier for people to get to work because workers are part of our economic system. Not everybody wants to work or is able to work, but those who want to and are able to are an important part of our system.
Right now, Congress is on the verge of passing what we hope is the CHIPS Act, which is making investments in some critical parts of our supply chain, such as semiconductors that will help increase economic growth. And finally, there’s lowering prescription drug prices for Americans. The reconciliation focuses on these drugs and affordable health insurance. So those are two very important salient costs for American families, and the president is focused on decreasing those costs.
What about Americans still grappling with student debt — can they expect any loan forgiveness?
We know student loans are a challenge for former students, and the president has been focused on them. He has been making moves to strengthen loan forgiveness programs for those who choose to go into the public sector. And he has as a campaign pledge to forgive $10,000 in student loans. He still needs to make that decision, and he will. The White House has said he’s going to make that decision in the coming weeks. But higher education is an important investment for people to be able to make, and it’s important that we have financial aid tools to make that affordable for everyone.
