Negative 1.4 percent real quarterly GDP growth and 8 percent inflation. What a combination. If the Fed raises interest rates to combat the inflation, it makes the growth problem worse. If the Fed eases interest rates to combat the negative growth, it makes the inflation problem worse. Likewise with Congressional spending as a form of fiscal stimulus for the economy, which Biden has pushing under the "Build Back Better" rubric. It looks a lot like later Carter or early Reagan. You can blame it on the Omicron variant of the Covid-19 pandemic or on the energy price effects of the Russia-Ukraine war, but it's an unpleasant combination even so, both for Biden's political hopes and for the household finances of American consumers.
Reagan got out of it with increased military spending, a Paul Volcker-led Fed that raised rates painfully high to wring out inflation, and marginal tax cuts that increased incentives to work, save, and invest. In a best-case scenario, Biden, Powell, and a newly Republican Congress could maybe deliver something approximating this, but it's not going to happen overnight and there will be plenty of pain along the way. In a really best-case scenario, some combination of a negotiated peace in Ukraine, improvement in the Covid-19 situation, and modest Fed rate hikes makes it all improve. I'm not even going to get into the worst-case scenarios but the stock market over the past few months seems to be starting to price some of them in.
