MORE MONEY, MORE PROBLEMS — The Federal Reserve acknowledged today what those of us in the midst of Christmas shopping already know — stuff is expensive! Fed officials said today that the central bank could raise interest rates three times in 2022, no longer calling inflation “transitory.” It’s an about face from the central bank and Chair Jerome Powell that comes as unwelcome news for Democrats and President Joe Biden — inflation has a tendency to take down the party in power. Democrats’ chances in Nov. 2022 could very well depend on Powell’s ability to keep prices in check while not choking off a fragile economic recovery. Nightly parsed the latest Fed tea leaves with economics reporter and Fed guru Victoria Guida over Slack today. This conversation has been edited. Will Powell be the Grinch who stole Biden’s Christmas? Haha. Right now, the Fed’s announcement is about giving itself as many options as possible to deal with an uncertain economy. That basically means that the central bank will be able to raise interest rates sooner, if it wants to. But it won’t do that until next year, so no — Christmas seems safe for now! Do Fed officials no longer believe inflation will be transitory? They now think these supply chain problems will last much longer than they thought — so this inflation might fade eventually, but transitory gives people the impression that it also won’t take that long. But also, the Fed is more open to the idea that inflation could start taking hold more broadly. Companies might start raising prices because they can, or because they’re worried they need to. And so part of this pivot is an effort to head off any change in expectations about inflation; the Fed doesn’t want people getting the idea that they’ll just let inflation stay this high because inflation can also be sort of a self-fulfilling prophecy. Is the Fed no longer concerned with virus trends? Powell said rising cases do pose a risk to the outlook, but people are learning to live with the threat of the coronavirus. Basically, the Fed is optimistic that things will continue improving for the economy, but they know that Omicron or some new variant could throw a wrench in things at any time. Our colleagues at Playbook highlighted a memo today that said voters’ views on the economy will harden by late summer, determining whether Democrats can stave off big midterm losses. Does anything from today’s announcement signal where things could be by then? It’s the conventional wisdom that presidents like the Fed to keep interest rates lower because it boosts the economy. But with inflation a big concern among voters, Democrats probably don’t entirely mind some of the tough talk coming out of the Fed. The Fed’s announcement today makes it a safer bet that inflation will be lower next summer, but I guess one question is how much lower it will need to be for voters to worry about it less. If there’s faster growth and a stronger job market, maybe they’ll mind less regardless. If the economy starts to slow, that’s a much bigger problem for the Democrats (and it’s not great for the rest of us either!) Welcome to POLITICO Nightly. Reach out with news, tips and ideas at nightly@politico.com. Or contact tonight’s author at rrayasam@politico.com, or on Twitter at @RenuRayasam.
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