Biden: My priority is to fight inflation 1:18
Washington (CNN) --
Prices in the United States will improve come rain, shine or shine.
That was the message from President Joe Biden on Tuesday as the United States faces a crucial week for the economy, which is entering a turbulent year.
The combination of rising oil and gasoline prices following the Russian invasion of Ukraine, concerns about inflation stemming from ongoing supply chain disruptions, and fears of aggressive interest rate hikes by the Federal Reserve have sent the market into a tailspin.
Where should you invest in this bear market?
Try wine, art and baseball cards
Bottom line: "It's a pretty bad storm," Joann Weiner, an economics professor at George Washington University, told What Matters.
Here's what to know about this week's Fed meeting on Tuesday and Wednesday, and why it matters.
All eyes on Wednesday's meeting
To fight inflation, the US central bank is expected to raise its benchmark interest rate by three-quarters of a percentage point, the biggest hike since 1994.
advertising
The Federal Reserve Has a New Plan to Avoid America's Recession: Go Back to 1994
This decision comes after the Federal Reserve raised its interest rate by half a percentage point in May, the biggest increase in 22 years.
CNN's Matt Egan puts it this way:
The fact that the Fed is moving decidedly away from zero shows confidence in the health of the labor market.
But the speed with which interest rates are expected to rise underscores his growing concern about the rising cost of living.
Investors expect the Fed to raise its target range to around 4% by the end of the year, from 1% today.
For context, as Egan points out, rates were as high as 5.25% before the Great Recession.
But what does this mean for consumers?
More from Egan:
Every time the Fed raises interest rates, it becomes more expensive to borrow.
That means higher interest costs on mortgages, home equity lines of credit, credit cards, student debt and car loans.
Loans to businesses will also become more expensive, for both large and small.
Americans will initially experience this policy change through higher borrowing costs: It's no longer incredibly cheap to take out a mortgage or car loan. And the cash deposited in bank accounts will eventually earn something, though not much.
What is the risk?
That the central bank goes overboard and slows down the economy so much that it accidentally causes a recession that increases unemployment.
Why such an aggressive rate hike?
To borrow an old phrase, drastic times call for drastic measures.
If you feel like your salary is running out faster than before, you're not alone.
Americans across the country are feeling the effects of inflation...everywhere.
The typical American household spends about $460 more each month than it did last year for the same basket of goods and services,
according to Mark Zandi, chief economist at Moody's Analytics.
And, for the first time, a gallon of regular gasoline now costs an average of $5 nationwide, according to a Saturday reading from the American Automobile Association.
(AAA).
The most recent release of the Consumer Price Index, the government's basic measure of inflation, offers no consolation in other respects: prices of food bought to eat at home rose 11.9% in the last 12 months;
the housing index, which measures rents and other related costs, registered an increase of 5.5%;
and the prices of used vehicles rose 16.1%.
The 10 states with the cheapest gasoline in the US
However, the producer price index, which measures wholesale prices before goods and services reach consumers, offered some good news.
This index rose 10.8% in May compared to the level a year ago, according to data released Tuesday by the Bureau of Labor Statistics.
Although still quite high compared to historical levels, it is lower than the revised 10.9% rise recorded in the April reading.
The politics of the economy
The Federal Reserve's ability to control inflation has enormous consequences in Washington.
If the upcoming midterm elections turn into a referendum on the economy, for example, Democrats have a big problem on their hands.
Just take a look at the S&P 500 index, one of the broadest measures of the US stock market.
The index has lost all of its gains since Biden took office early last year.
The Dow index falls 876 points and stocks enter a bear market on fears of aggressive interest rate hikes
The president and Democrats in Congress, of course, acknowledge the threat a faltering economy poses to their midterm aspirations, along with the drag it could pose in 2024. And it's hard not to look at recent
White House decisions.
through that lens.
For example, Biden will visit Saudi Arabia next month, where he is expected to engage in some way with Crown Prince Mohammed bin Salman, something he campaigned against at the time.
Speaking to reporters over the weekend, the president insisted the trip was not tied to global energy prices, though his advisers have openly said the need to increase oil production to stabilize prices is a key driver of restarting talks with the Saudis.
The good news for the White House is that economies are not always a good indicator of political prospects:
Bad economies don't always make re-election difficult.
As CNN's Paul R. La Monica writes: The market plunged 16.5% in the first 510 days of Ronald Reagan's presidency, which was also a period of historically high inflation.
Stocks fell 25% in the early part of George W. Bush's presidency, when the market was in the midst of collapsing the dotcom bubble and struggling to recover from 9/11.
But both Reagan and George W. Bush ended up being re-elected.
Good economies do not always ensure re-election.
Stocks, meanwhile, soared more than 20% early in the terms of George HW Bush and Donald Trump in the Oval Office.
Neither man was elected to a second term.
"The bottom line is this: I sincerely believe we've made extraordinary progress in laying a new foundation for our economy," Biden said Tuesday, "you'll see once global inflation starts to recede."
Biden insists that his priority is to fight inflation but that the Republicans are not helping him
What if the Fed doesn't make it?
The chairman has repeatedly stressed the importance of letting the Fed do its job independently, and has put his faith in its ability to deal with inflation.
But what if the Fed sends the economy into a recession?
"From a 30,000-foot level, if you look at it from above, I expect a recession, if we have one, to last six months, nine months, something like that," Zandi told CNN this week.
"Unemployment would go from 3.6% to 5.5%, 6%, something like that. Not good, but you know, in the grand scheme of things, kind of more typical, comparable to other recessions we've experienced in the past".
Indeed, a growing number of analysts believe the Fed acted too late on inflation to achieve a "soft landing."
But there have been rare occasions when the central bank has managed to cool down the economy and keep prices in check without spiraling down: once in 1965, and once in 1984 and 1994.
The good news, according to Weiner, is that the Fed has gotten better at signaling its intentions: "As long as the Fed does what is expected, things won't collapse."
-- CNN's Chris Isidore and David Goldman contributed to this report.
Federal Reserve