AI Summary
5 min readIn the run-up to the 2022 midterm elections, the most powerful economic force voters are feeling is not a policy debate in Washington—it is the price at the gas pump. As Morgan Stanley’s Mariana Salvatore and Seth Carpenter explain, the oil shock hitting consumers is both economically significant and politically salient, while the window for Congress to do anything about it is closing fast. The conversation is a grounded look at how macroeconomics, legislative mechanics, and electoral timing interact when affordability is the defining issue.
The Oil Shock as a Drag on Growth
The immediate economic story is straightforward: higher energy prices are hurting consumer spending. Carpenter’s team estimates that elevated gas prices, which are likely to persist for the rest of the year, will “more than enough to offset any boost to consumer spending from the higher tax refunds this year.” The net effect is a downward revision to U.S. growth forecasts by three to four tenths of a percentage point for the year.
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What you'll learn
- 1 (00:00) **Episode Introduction & Hosts** - Mariana Salvatore and Seth Carpenter introduce the episode's focus: the midterm elections, macro outlook, and policy response.
- 2 (00:40) **Oil Shock’s Macro Impact: Growth Drag & Consumer Spending** - Seth explains how higher gas prices offset tax refund boosts and lower growth forecasts.
- 3 (01:40) **Oil Price Pass-Through to Inflation: Limited to Headline** - Seth details why the oil shock is unlikely to cause persistent core inflation.
- 4 (02:11) **Salience of Gasoline Prices & Political Overlay** - Mariana and Seth connect visible price shocks to voter perception ahead of midterms.
- 5 (02:41) **Congressional Options: Five Vectors, Binding Constraints** - Mariana outlines potential policy levers and the real-world limits on Congress.
- 6 (03:11) **Four Key Constraints on Congress** - Seth walks through the binding limits on fiscal action: deficits, procedure, timing, and implementation.
- 7 (04:36) **If Stimulus Happens: What Matters Most?** - Seth analyzes the macro impact of hypothetical targeted relief.
+ Full timestamped outline available in the app
Guests on this episode
Show Notes
Still six months out, the U.S. midterm elections are likely to influence government initiatives to deal with higher energy costs. Our Head of Public Policy Research Ariana Salvatore and Global Chief Economist Seth Carpenter discuss how the Congress and the Fed might react.
Read more insights from Morgan Stanley.
----- Transcript -----
Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of Public Policy Research for Morgan Stanley.
Seth Carpenter: And I'm Seth Carpenter, the firm's Global Chief Economist and Head of Macro Research.
Ariana Salvatore: Today we're discussing the run up to the midterm elections and what it could mean for the macro outlook and policy response.
It's Wednesday, April 29th at 10am in New York.
Last week, Mike Zezas and I talked through the midterm elections and their potential consequences for the economy and markets. This week we figured it might be helpful to talk about the setup into November, especially as we're both increasingly being asked about the macro outlook and potential for targeted stimulus to offset the oil shock.
So, Seth, let's start there. we know cost of living is a key issue in elections, and we've seen a pretty meaningful oil shock feed through markets. How are you thinking about that in the context of the broader economy?
Seth Carpenter: Our U.S. economics team has estimated that the higher gas prices that we have now and likely to have for the rest of the year are going to be more than enough to offset any boost to consumer spending from the higher tax refunds this year. So, I think that's the first point.
If you're expecting a boost to come through that channel, you probably want to unwind that. And In fact, overall, what we've done is lowered our forecast for U.S. growth by about three or four tenths of percentage point worth of growth this year because of the higher energy prices. So, it's a drag on spending, I think, no matter how you cut it.
Ariana Salvatore: And that's not happening in isolation, right?
Seth Carpenter: No, that's exactly right. That's exactly right. We've also got at least somewhat restrictive monetary policy layered on top. So, financial conditions are already a little bit tight and the oil price shock sort of amplifies that tightening by weighing on spending. That's going to be really important.
I think an extra complication then is what does it do to inflation? For now, we don't think it's going to be that big of a deal. History says at least looking at the data that when energy prices go up, when oil prices go up, gasoline prices go up. It does boost headline inflation for sure, but the pass through to core inflation is
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