Inflation: 'There are lots of villains' behind higher prices, strategist says

AGF Investments Chief U.S. Policy Strategist Greg Valliere joins Yahoo Finance Live to discuss President Biden's address yesterday on inflation, COVID-19 cases, and the Build Back Better plan.

Video Transcript

AKIKO FUJITA: One year since the president took office. And, Brad, this is really interesting how things are being framed in the one-year context. Because when you look at the numbers-- 6.4 million jobs created, a sharp decline in the unemployment rate-- things do look good. And yet inflation continuing to plague the White House with levels at near 40-year highs. We heard from the president yesterday in a near two-hour press conference saying he is happy to double down on his record.

JOE BIDEN: I'm happy to debate and have a referendum on how I handled the economy-- whether or not I've made progress on-- look, again-- I'm taking too long answering your questions. I apologize. I think that the fundamental question is, what's Mitch for?

What's he for on immigration? What's he for? What's he proposing anything better? What's he for dealing with Russia that's different than I'm proposing and many of his Republican friends or his colleagues are supporting as well? What's he for?

AKIKO FUJITA: The president there, of course, referring to Mitch, as in Senator Mitch McConnell. Well, let's bring in our first guest for the hour to dive in a little deeper into the president's record one year on. We've got Greg Valliere, AGF Investments Chief US policy strategist.

And, Greg, it feels like the White House has a bit of a messaging issue here. Because if you look at the broader economic data, things have been ticking higher since he took office. And yet they just can't escape that big cloud of inflation.

GREG VALLIERE: Well, you're right, Akiko. I mean, the economy is in pretty good shape. The unemployment rate is remarkably low. But they can't sell their story very well. There's shortages in stores. Inflation, obviously, is a big problem. And after two hours talking to the American public, what people will remember was a really serious gaffe that he made on Ukraine.

BRAD SMITH: And so, as we continue to think about what the president said yesterday as well, and especially given this broader topic of inflation and even with some of the picks that he's put forward for the Fed, he did say yesterday, given the strength of our economy and recent price increases, it's appropriate, as Fed Chair Jerome Powell has indicated, to recalibrate support that is now necessary. And so walk us through from your perspective the picks that President Biden has made in order to take on this daunting task of curbing inflation.

GREG VALLIERE: Well, Brad, I don't think he had much of a choice. I think he had to do this. He had to give the power or the blessing, I guess, to Jerome Powell to begin hiking rates. And be careful what you wish for. Because three or four rate hikes this year could start to hurt a little bit.

In all the years I've been doing this, I rarely have seen a US President welcome higher interest rates from the Fed. They don't like to see higher rates. And unfortunately for Biden, that's what he's going to get.

AKIKO FUJITA: You know, on that front, it felt like there's a bit of a pivot yesterday from the president, now pointing the finger at the Fed to say, look, inflation is higher. But that's also-- in terms of price stability, that's part of the mandate of the Fed. When you take a step back and look how quickly prices have climbed, how much of that do you think is about the Biden policy, how much of this is about Fed policy?

GREG VALLIERE: Well, there are lots of villains, I guess, you could point to. One is I think Jerome Powell was a little too complacent, didn't recognize the severity of the problem until, you know, summer. And that was, perhaps, a little bit late. The supply chain issues are huge. And I think, unfortunately, they're going to persist for at least another half a year or so.

And obviously, there's COVID. But I'd say the politicians that I talk to here in Washington would tell you their big problem is all the spending. And a lot of their constituents are saying that as well. So that means, in my opinion, getting the Build Back Better bill, or parts of it, which Joe Biden would like to get in the next few months-- are we going to spend a lot more money in an economy that's this hot? Maybe not.

BRAD SMITH: And so variants continue to be the unknown variable here, especially considering how the Fed also has to take in whichever steps policy-wise that they take in, even on the spending side that we had seen earlier on in the pandemic, that economic detriment that was incurred a direct result to not just the initial, the Alpha, of COVID-19, but then later on where there were more thoughts about where there needed to be a deployment of capital and where there still needed to be parts of the economy that needed to be upheld over time. And so from your perspective, with that unknown variable of the variants going forward, you know, where might this policy even need to be amendable in the future?

GREG VALLIERE: Well, the economy has gotten a lot of medicine in the last year-- an enormous amount, $6 trillion or so in infrastructure and COVID relief. And many states, California in particular, New York state, incredibly, are flush with cash right now. They have more money than they know what to do with.

If I were governor, I'd put a lot of the money into a rainy day fund. But they're going to be spending a lot of money. So I think all the medicine this economy has gotten will keep the economy in pretty good shape. We just can't have inflation at this level. I think Biden realizes it, and I think he's going to have to accept it.

But really, even if the Fed funds rate gets to 1% and 1.25%, that's still a pretty low Fed funds rate. And I think it's not going to be necessarily crippling for the wider economy.

AKIKO FUJITA: Greg, looking ahead to now year two of the Biden administration, certainly midterms looming in the fall-- there's a lot of questions about what happens with a key part of his domestic agenda in Build Back Better. It felt like the president was kind of conceding yesterday that this will have to be broken up. How do you think the key priorities in this roughly $2 trillion bill moves forward, especially given the politics?

GREG VALLIERE: I think he's going to succeed on some of this. I think Joe Manchin is perfectly happy to get pre-K funding. He's always been a big proponent of it. I think Manchin would agree to some expansion of Obamacare. I think Manchin might even agree to a lot of environmental provisions.

So if you split this up into two, or three, or even four bills, I think some of it will get done. That would be a very desperately needed victory for the Democrats. Because I'd have to say right now, here we are in the middle of January-- we've got a long way to go, but right now, I would say that the issue is not whether the Republicans take the House. The issue is by how many seats.

They only need five. I think the Republicans might get 20. And I'm on the low side. There are many other analysts who think it could be 25, 30, 35 seats. So Biden needs some victories, and maybe the first victories he gets by spring time is some form of Build Back Better.