US Inflation vs. Biden’s Approval Rating (Interesting, But Incomplete…)

The chart below (which has been circulating around in recent weeks/months) shows the dynamics of President Biden’s approval rating vs. US CPI inflation in the past year. Even though there have been multiple factors driving the popularity of US Presidents over time, we can agree that the surge in inflation has been one of the major factors behind the sharp fall in Biden’s approval rating in the past twelve months (from 54% in February 2021 to 43% in latest polls).

Source: Bloomberg, fivethirtyeight.com

It is an interesting chart, though it is incomplete. US inflation will remain one of the major themes in markets for 2022 as inflationary pressures are likely to stay elevated longer than what policymakers previously anticipated. Therefore, the Fed will come under tremendous political pressure this year to tighten aggressively to ‘accelerate’ the convergence of inflation back towards its target.

Will Biden’s popularity surge back above the 50% threshold if inflation falls as the Fed tightens?

US politicians must not forget the ‘wealth effect’ factor and the importance of the dynamics of equities in the medium term. An aggressive tightening is likely to weigh on risky assets in the coming year after experiencing a tremendous rally in the past two years following the Covid19 shock. Hence, the impact of inflation Biden’s approval needs to be conditioned on equity market’s performance.

Is it better to have a 7%+ inflation and trending markets or 3% inflation and equities down 25%?

The $64,000 question

While the Fed is expected to purchase 240bn USD of Treasuries each quarter in 2021, net Treasury supply is estimated to be significantly higher at around 600bn USD per quarter (2.5 times higher); and this does not even include the recent 1.9tr USD Biden proposal. Even if the Biden administration does not end up being as aggressive as initially proposed, even a 1-trillion-dollar ‘stimulus’ program will significantly increase the divergence between net Treasury issuance and net Fed purchases.

What will happen to US interest rates in 2021? On one hand, we know that long-term interest rates cannot rise too much from current levels as a significant (upside) move in the 10Y yield could end up having a dramatic impact on the equity and/or corporate bond markets. On the other hand, if the Fed goes ‘all in’ and matches 1-to-1 the net issuance of US Treasuries as they did in 2020, other central banks (i.e. ECB, BoJ) will have no other choice than to fight the USD depreciation as policymakers will certainly not let their currency appreciate indefinitely.

Source: Fed, US Treasury, RR estimates