Democrats Increasingly Worry About The Federal Reserve Crushing The Economy
In a letter to Fed chair Jerome Powell on Tuesday, Sen. Sherrod Brown (D-Ohio) urged him to remember that Congress tasked the central bank with maintaining both stable prices and full employment.
But more Democrats are showing signs of Fed skepticism, said Rakeen Mabud, chief economist at Groundwork Collaborative, a progressive think tank that has been warning about the dangers of tight monetary policy all year. “The Fed has no control over the main drivers of rising prices, but the Fed can slow demand by getting a lot of people fired and making families poorer,” Warren said at a hearing in June.
Interest rate hikes squeeze the economy by making money costlier to borrow, slowing the economy and eventually resulting in slower price increases as demand falls into balance with supply. In September, they estimated rate hikes would push the unemployment rate to 4.4% next year, which would likely amount to a recession.
In a letter to Fed chair Jerome Powell on Tuesday, Sen. Sherrod Brown (D-Ohio) urged him to remember that Congress tasked the central bank with maintaining both stable prices and full employment. The Fed ’s actions could cause massive layoffs, the senator warned.The letter represented Brown’s strongest warning this year about the consequences of the Fed ’s interest rate increases, which are supposed to slow price growth by slowing down the entire economy ― a process that could cause a recession if the Fed pushes too hard.Democrats and Republicans alike mostly support Powell’s efforts, which have included the sharpest interest rate hikes in decades alongside selling off bonds the Fed purchased in order to protect the economy during the pandemic. After the sharp partisan split over spending last year , the bipartisan consensus on the Fed has been remarkable.But more Democrats are showing signs of Fed skepticism, said Rakeen Mabud, chief economist at Groundwork Collaborative, a progressive think tank that has been warning about the dangers of tight monetary policy all year.“We’re seeing more and more lawmakers raising the alarm that the Fed is going down the wrong path, putting the incredible recovery that we’ve seen thus far in jeopardy,” Mabud said, citing several comments from lawmakers since June.“The Fed risks throwing our economy into a massive recession,” Mabud said. “That’s essentially what Powell has committed to doing. He’s hacking away at the one leg of the stool that’s holding up our economy, which is a strong labor market.”Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) have led their colleagues in criticizing the central bank. Sanders said this month that the Fed is “hurting the situation” and that corporate greed is the real problem.Warren has been more strident. “The Fed has no control over the main drivers of rising prices, but the Fed can slow demand by getting a lot of people fired and making families poorer,” Warren said at a hearing in June. Interest rate hikes squeeze the economy by making money costlier to borrow, slowing the economy and eventually resulting in slower price increases as demand falls into balance with supply. Powell has acknowledged that the Fed can’t affect the supply problems contributing to inflation and that slashing demand will involve some “pain” for everyday people .So far, the rate hikes have slowed down the housing market, which is heavily dependent on borrowing, but have not had an obvious effect on the broader economy. The latest data show inflation as high as ever and unemployment still at a very low 3.5%.Powell and his colleagues are set to announce another rate hike next week, as well as fresh projections of the likely economic effect. In September, they estimated rate hikes would push the unemployment rate to 4.4% next year , which would likely amount to a recession. The September estimate was half a percentage point higher than the July estimate because of how little the rate hikes over the summer slowed inflation.Several Democrats expressed concerns about the risks of rate hikes in a Politico article earlier this month. Sen. Chris Van Hollen (D-Md.) said it’s “important that they not choke off the job recovery,” and Sen. Tina Smith (D-Minn.) said higher interest rates aren’t “all that effective for some of the most significant inflationary pressures that we’re facing.” But they and other Democrats still said they thought Powell was doing a good job.
