The current state of the economy is [fill in the blank]. The future state of the economy is [fill in the blank]. Policymakers throughout Washington, D.C. are trying their best to fill in the blanks.

A ‘Vibes Recession’ In A Confusing Economy

It’s a confusing economy. Inflation has ebbed but not subsided. The Federal Reserve’s aggressive rate hike campaign and a banking crisis have produced something of a credit crunch.

Yet the unemployment rate is at its lowest level in 54 years. The Black unemployment rate is at its lowest level ever. Wages are still growing.

There are four potential outlooks for the economy – a soft landing (low inflation/low unemployment), a hard landing (low inflation/high unemployment), no change (high inflation/low unemployment), or stagflation (high inflation/high unemployment).

Jason Furman, a Harvard economist and former chair of the Council of Economic Advisors, has a useful outlook of what could happen through the end of the year.

There’s no one clear outlook for how the economy will unfold. This leaves an oxymoronic economy, with terms like a “non-recession recession” or “job-full recession.”

But there is certainly a “vibes recession.” Less than 20% of Americans believe the economy is good, with a majority believing the country is already or about to be in a recession. Partisanship also plays a role – Republicans have a more negative view of the economy than Democrats, the opposite from when President Donald Trump was in office.

A bad economy – or rather, the trend of a bad economy – isn’t good for incumbents. President Joe Biden’s economic approval rating is lower than his overall approval rating, the opposite from Trump. But Biden isn’t alone with economic approvals in the doldrums. Federal Reserve Board Chair Jerome Powell, who once had the highest economic confidence for a Fed chair since Alan Greenspan, now has the lowest on record at just 36%, according to Gallup.

For elections, the economy is as much about the trends as it is about the current situation. The “jobless recovery” was predominant in the 2010s, but the economy was seen as improving in 2012, giving President Barack Obama a boost in his re-election. The economy was moving along in 2016, but there was a recession in much of “Trump country” to help Trump defeat former Secretary of State Hillary Clinton. The pandemic in 2020 crashed the recovery, but there was a quick economic rebound from the fiscal and monetary response that made the economy as an issue something of a wash in the minds of voters.

Typically, the gauge for the economic impact on an election doesn’t come until Q2 of an election year. There’s still time for the economy to improve or deteriorate before voters begin making lasting decisions for 2024.

The Economy and The Federal Reserve

The Fed remains the most important institution to impact the economy this year and next. The Federal Open Market Committee this month unanimously voted to raise the federal funds rate to 5-5.25%, the most restrictive levels in 16 years. But the guidance from the FOMC indicated a potential pause in rate hikes. The market is expecting a rate pause followed by a rate cut between 50-75 bps by the end of the year.

The Fed is facing a delicate tightrope between price control and maximum sustainable employment. Powell is still hopeful they can achieve a soft landing, although Fed staff believes a recession is coming later in the year.

Unlike other Fed chairs in the past, Powell is not a PhD economist. He is more willing to look at the data to make a decision on monetary policy than adhere to any single model. The banking crisis and the signs of a credit crunch are warranting a potential pause in rates.

But Powell is an institutionalist, something the markets continue to underestimate. A Fed chair’s reputation and legacy comes first and foremost in his or her ability to fight against inflation. “I think that policy is tight,” Powell said at a press conference this month. “We are prepared to do more if greater monetary policy restraint is warranted.”

Perception is just as important as reality. If businesses and consumers think inflation will remain pervasive, they will adjust to a high-inflation world. In such a world of elevated inflation, even at lower levels from last year, Powell and the FOMC likely won’t sit on their hands. A recession could be a necessary evil, something that would be a political challenge for Democrats in 2024.

The Economy and The Presidency

Biden’s re-election launch video last month focused on freedom and democracy, not the economy. But just because Biden isn’t basing his re-election primarily on the economy, that doesn’t mean there’s no economic agenda from the White House and the administration.

Biden is embracing his populist, “Scranton Joe” roots on the economy. He’s focusing on implementing an American industrial policy. He proposed tax hikes on the wealthy and corporations in his FY 2024 budget. He’s looking for wins through the regulatory agenda, like the Department of Transportation’s attempt to get air travelers full compensation on delayed and canceled flights. His prudential regulators are looking to implement new banking regulations that provide stricter controls on mid-sized and large banks while looking to the biggest banks to replenish the Federal Deposit Insurance Corporation’s deposit insurance fund. The president has a prodigious and progressive antitrust team that is cooling M&A acting and trying to change long-time corporate practices like the use of noncompete agreements.

This vision is contrasted with Democratic attacks on the GOP vision of the economy and the immediate threats to job gains if Republicans don’t raise the debt ceiling.

However, Biden faces a balancing act. A populist agenda to appease his base of support can create headwinds for the economy, which has drawbacks to the general electorate. Too many banking regulations could curtail lending, a pro-union and protectionist agenda could curtail the deployment of industrial policy, a pro-environmental agenda could spike energy costs, and taking a firm position on the debt ceiling against “MAGA” Republicans could leave the economy hampered.

The Economy and Divided Congress

It’s always a safe bet to say a divided Congress will get little done. In a world where the two parties are more polarized than ever before but the margins between being the majority and minority are thin, the two sides have little incentive to negotiate with each other. Party leaders see the potential of being in the majority after the 2024 elections where they can deploy a reconciliation agenda without the need for bipartisan compromise.

Yet there are forcing mechanisms on policy that can have an economic impact. In the immediate term, that’s the debt ceiling. In the medium term, that’s FY 2024 appropriations.

Both sides want to be able to declare victory on these policy negotiations, but getting there could cause heartburn for the markets. There are fiscal headwinds on the economy with the debt ceiling and appropriations, but just how big depends on negotiations. A deal on both could include nominal cuts to baseline spending, with some potential economic boosts from an agreement on permitting reform.

On the flip side, there are some catalysts that could bolster congressional action impacting the economy. If the economy does enter a recession, there may be some space for targeted tax policy. House Republicans are planning to introduce a tax package that revives R&D expensing, more generous interest deductibility limits, and 100% bonus depreciation. Democrats are still clamoring for action on the lapsed enhanced Child Tax Credit. But a recession could grease the wheels for an under-the-radar negotiation that gets some modest tax policies from both sides.

The Economy and The Supreme Court

In an era of more publicized and consequential executive action, the judiciary has a role to play in some of the biggest economic questions in Washington, D.C. That’s especially true with a conservative Supreme Court and a progressive White House.

The Supreme Court is deliberating over the constitutionality of Biden’s student loan debt forgiveness executive actions in Biden v. Nebraska and Department of Education v. Brown. The court agreed to take up cases next session that could re-evaluate the Chevron doctrine, a legal precedent of judicial deference to regulatory agencies’ interpretations of laws, and the constitutional authority of the Consumer Financial Protection Bureau. If Biden decides to take executive action on the debt ceiling, there would likely be grounds for litigation (in fact, there already is) that could wind its way up to the top court of the land.

The 6-3 conservative Supreme Court isn’t afraid to make an impact on the economy and political system. The Court striking down Biden’s student loan debt forgiveness program would create macroeconomic headwinds for an executive action estimated to provide hundreds of billions in relief to student loan borrowers. The Court could very well upend the regulatory agenda for Biden next year, a factor that the administration will have to take into consideration in crafting and finalizing different rules. Just like in the midterm elections with abortion, this drags the Supreme Court into the political zeitgeist as Democrats attack what they believe to be an activist court.