[The Viewpoint of Dongki Kim] The Economics of the U.S. Presidential Election: Inflation and Interest Rate Turbulence

Attorney Dongki Kim (author of The Power of Geopolitics, The Power of the Dollar)

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New job creation in the United States exceeded expectations in January, increasing by as many as 353,000. The unemployment rate stands at 3.7%, having remained below 4% for the past two years. The S&P 500 is reaching new highs. The U.S. economy showed solid growth with an annual growth rate of 2.5% last year. However, according to a Gallup poll conducted in February, only 36% of Americans have a positive view of the Biden administration’s economic management.

First and foremost, inflation is the problem. The inflation rate has dropped from 9% annually to about 3%, indicating a moderation in inflation based on the indicators. Yet, more than two-thirds of voters are dissatisfied with inflation.

Food prices have risen by 25% compared to four years ago. Additionally, nearly three-quarters perceive that price increases are outpacing household income growth. It will be difficult for prices to return to 2019 levels. This frustrates people. Former President Donald Trump attacks the current inflation rate as being higher than during his tenure, and many Americans sympathize with this view.

The causes of inflation in the U.S. are complex. The Trump administration supplied $2.2 trillion in COVID-19 relief funds in March 2020, and another $900 billion in December of the same year.

President Biden also implemented $1.9 trillion in financial support on his first day in office. While this aid allowed households to increase consumption, it also became one of the causes of inflation. Furthermore, the COVID-19 pandemic caused shortages in semiconductors and disruptions in supply chains, contributing to rising prices.

The most important factor is that the Federal Reserve failed to respond proactively. The Fed only began raising interest rates in March 2022, when inflation was nearly 8%. If the Fed had acted a year earlier, the situation might have been different. The Fed may have been concerned that preemptive rate hikes could worsen the economy.

Monitors at the New York Stock Exchange (NYSE) broadcasting the press conference of Jerome Powell, Chairman of the Federal Reserve (Fed). Photo by Reuters and Yonhap News Agency

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The problem is that Americans dislike interest rate hikes aimed at curbing inflation. Senator Elizabeth Warren and others have pointed out that high mortgage rates have made home purchases very difficult. Due to high interest rates, home sales recently remained at their lowest level in 13 years. Technology companies and small and medium-sized enterprises also faced difficulties in financing because of high rates.

Traditionally, employment and inflation are seen as key factors influencing consumer sentiment, but recent research by Harvard Kennedy School professor Lawrence Summers and others shows that consumer sentiment is closely related to borrowing costs and the availability of consumer credit.

Although mortgage loans, auto loans, and credit card loans have become more expensive due to high interest rates, these costs are not reflected in the current Consumer Price Index. Considering individuals’ interest expenses and homeownership costs, inflation in November last year would increase from 3% to 9%. According to a consumer sentiment survey in December last year, only 29% of respondents still considered it a good time to buy a car, and only 16% thought it was a good time to buy a house. This starkly illustrates the frozen consumer sentiment.

There is potential for consumer sentiment to improve with the Fed’s interest rate cuts, but it will take time for this to be felt, so whether it will help the Biden administration remains to be seen. The U.S. Conference Board announced that the U.S. Consumer Confidence Index fell in February for the first time in four months, reflecting uncertainty in the U.S. economy.

The Biden administration promotes the achievements of “Bidenomics.” Meanwhile, Trump claims there are economic problems but insists, without basis, that stock prices rose because his election victory is imminent. Moreover, he spreads conspiracy theories that the Fed is considering rate cuts to help Biden. Political battles over the economy will intensify. As a result, the upcoming U.S. presidential election this year will determine who wins the hearts of voters.

Kim Dong-gi, Attorney · Author of The Power of Geopolitics, The Power of the Dollar

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