Democrats increasingly concerned about Federal Reserve crushing economy

A small but growing number of Democrats worry that the Federal Reserve is causing too much collateral damage in its quest to control inflation.

In a letter to Fed Chairman Jerome Powell On Tuesday, Sen. Sherrod Brown (D-Ohio) urged him to remember that Congress instructed the central bank to maintain both stable prices and full employment. The Fed’s actions could lead to mass layoffs, the senator warned.

“For American workers who are already feeling the crush of inflation, job losses will make matters worse,” Brown wrote. “We cannot risk the livelihoods of millions of Americans who cannot afford it.”

The letter represented Brown’s strongest warning this year about the consequences of Fed interest rate hikes, which are meant to slow price growth by slowing the broader economy – a process that could cause a recession if the Fed pushes too hard.

Democrats as Republicans primarily support Powell’s efforts, which included the steepest interest rate hikes in decades, as well as the sale of bonds bought by the Fed to protect the economy during the pandemic. After the sharp partisan divide on spending last year, the bipartisan consensus on the Fed has been remarkable.

But more and more Democrats are showing signs of skepticism of the Fed, said Rakeen Mabud, chief economist at Groundwork Collaborative, a progressive think tank that has warned of the dangers of tight monetary policy all over the world. year.

“We are seeing more and more lawmakers sounding the alarm that the Fed is heading down the wrong path, jeopardizing the incredible recovery we have seen so far,” Mabud said, citing several comments from lawmakers. since June.

“The Fed risks plunging our economy into a massive recession,” Mabud said. “That’s basically what Powell is committed to doing. It attacks the one leg of the stool that supports our economy, which is a strong labor market.

Powell has indeed hinted that he thinks the labor market is too strong, with workers having excessive bargaining power for higher wages.

The senses. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) led their colleagues to criticize the central bank. Sanders said this month that the Fed is “damaging” and that corporate greed is the real problem.

Warren was more vocal. “The Fed has no control over the main drivers of rising prices, but the Fed can dampen demand by laying off a lot of people and impoverishing families,” Warren told a hearing in June.

Interest rate hikes weigh on the economy by making money more expensive to borrow, slowing spending, and ultimately causing slower price increases as demand balances out with supply. Powell acknowledged that the Fed cannot influence supply problems that contribute to inflation and that reducing demand will cause some “pain” for ordinary people.

So far, rate hikes have slowed the housing market, which relies heavily on borrowing, but has had no obvious effect on the broader economy. The latest data shows inflation higher than ever and unemployment still at a very low level of 3.5%.

Powell and his colleagues are expected to announce another rate hike next week, along with new projections of the likely economic effect. In September, they estimated that rate hikes would push the unemployment rate up to 4.4% next year, which would likely equate to a recession. September’s estimate was half a percentage point higher than July’s due to the modest slowdown in inflation from rate hikes over the summer.

Several Democrats worried about rate hike risks in a Politico article earlier this month. Sen. Chris Van Hollen (D-Md.) said it’s “important that they don’t stifle the jobs recovery,” and Sen. Tina Smith (D-Minn.) said rates Higher interest rates aren’t “very effective for some of the most significant inflationary pressures we face. But they and other Democrats have always said they think Powell is doing a good job.

In June, the senses. John Hickenlooper (D-Colo.) and Ben Cardin (D-Md.) also expressed concerns. “When you raise interest rates, it has a major negative impact, certainly on affordable housing,” Cardin said. says The Hill.

Representative Ro Khanna (D-California), meanwhile, told CNN early October that the Fed had been too slow to deal with inflation and is now too aggressive.

“The Fed didn’t get the blame it deserves,” Khanna said.