Republicans and Democrats have wildly different plans to kill inflation, but the Federal Reserve has the real power.
Democrats and Republicans have very different plans to fight inflation before the midterms.
Democrats aim to lower prices by building better, while the Republican Party wants a strict spending limit.
The Fed alone holds the key to eliminating inflation, and neither plan is likely to become law soon.
Democrats and Republicans have ideas about tackling inflation, and they couldn't be more different.
Prices are still rising throughout the US economy. The Consumer Price Index - among the most closely watched measures of inflation in the country - showed that the inflation rate reached 7% year-on-year in December, the fastest pace since 1982. While some indicators point to a peak in inflation, it is expected to remain Price growth is high throughout 2022.
Democrats see new spending rein in inflation, while the Republican Party pushes for a hard cap on future spending. Whether they can achieve their goals—or move their plans into the president's office at all—is a different story. And no matter what Congress wants or does, the Federal Reserve holds the real key to fighting inflation.
President Joe Biden approved trillions of dollars in new spending between the March stimulus package and the latest bipartisan infrastructure plan. But rather than undo the spending spree amid historical inflation, the president is doubling down on its value.
Biden coined his plan to Build Better as an inflation killer for Democrats at a January 19 news conference, saying that the proposal would "address the biggest costs working families face every day.". Biden argued that by spending on child care, medication, and energy costs, the BBB could help Americans pay less on critical goods and services.
Maya McGuinness, chair of the Nonprofit Committee on Responsible Federal Budget, said the proposal could be effective but perhaps not fast enough. "If you can increase supply and production capacity, it will not help with inflation," she said
Meanwhile, some Republican senators have a plan to derail inflation for good. A bill introduced January 12 by South Carolina Senator Tim Scott of South Carolina aims to ban government spending estimated to raise inflation above 4.5% yearly. The measure will use the Congressional Budget Office estimates of a bill's impact on the consumer price index. Although the proposal has only been submitted, it has 12 sponsors and represents the Republican Party's latest plan to scrap Biden's ambitious spending plans.
Neither plan is likely to become law any time soon.
For starters, neither proposal has the unanimous support of his party. For months, Senator Joe Manchin of West Virginia has been an obstacle to the BBB, arguing that Democrats should not pass another massive spending package until inflation abates. He recently told Insider's Josef Zeballos Roig that his negotiations with the White House on the plan would be "starting from scratch" later in 2022, further delaying the Democrats' plan to fight inflation.
Democrats aren't the only ones to disagree. Senator John F. Kennedy of Louisiana recently opposed the GOP's Inflation Prevention Act, telling Insider January 19 that the bill wouldn't do enough to bring inflation back to comfortable levels.
"You have to eliminate it," he said of the proposition that you can't put an end to inflation. "The ideal situation is for businesses to be profitable, with higher wages, but no inflation, and that is possible," he added.
A 50/50 split in the Senate, where Democratic Vice President Kamala Harris holds a watershed vote, also stands in the way of the GOP's proposal, not to mention Biden's inevitable objection. Still, the legislation hints at how Republicans could fight price growth if they swept the midterm elections.
Inflation is mainly in the Fed's hands now anyway.
And despite all the discussions both sides are preparing to have about inflation, there is no magic bullet to calm price growth. The Fed is the only authority to raise interest rates, which has historically been the most effective way to curb price growth.
"Inflation is the hot topic, and everyone wants to come up with a solution," McGuinness said. "But the truth is, this is primarily the responsibility of the Federal Reserve to be addressed."
Several signs indicate that the central bank began its hiking cycle in March. Federal Reserve Chairman Jerome Powell offered the most apparent hint yet on Wednesday.
He said the FOMC was "considering raising the fed funds rate at the March meeting" as long as conditions were right.
However, the Fed operates independently of Congress and the White House, so it would not adjust its policy for political reasons in theory. That leaves lawmakers on both sides of the aisle in an awkward place. Neither side can get the Fed to use its proven tool to kill.
Inflation, but both want credit to kill inflation. Right now, the most they can do is try to coordinate with the central bank, and some are already looking to do so.
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