A small but growing number of Democrats worry that the Federal Reserve may be doing too much collateral damage in its attempt to control inflation.
In a letter to Fed Chair Jerome Powell on Tuesday, Senator Sherrod Brown (D-Ohio) urged him to remember that Congress has mandated the central bank to maintain both stable prices and full employment. The Fed’s actions could result in massive layoffs, the senator warned.
“For working Americans, who are already feeling the pressure of inflation, losing jobs will make it a lot worse,” Brown wrote. “We cannot risk the livelihoods of millions of Americans who cannot afford it.”
The letter was Brown’s strongest warning this year about the fallout from the Fed’s rate hikes, which are designed to slow price growth by slowing the broader economy — a process that could cause a recession if the Fed pushes too hard.
Democrats and Republicans largely support Powell’s effort, which has included the biggest rate hikes in decades, along with selling bonds the Fed has been buying to protect the economy during the pandemic. After last year’s sharp splits on spending, 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 warned all year of the dangers of tight monetary policy.
“We’re seeing more and more lawmakers sounding the alarm that the Fed is going down the wrong path and jeopardizing the incredible recovery we’ve seen so far,” 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. He is hacking at the one leg of the stool that supports our economy, which is a strong job market.”
Indeed, Powell has indicated that he believes the labor market is too strong and workers have excessive bargaining power for higher wages.
Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) have led their peers in criticizing the central bank. Sanders said this month that the Fed is “damaging the situation” and that corporate greed is the real problem.
Warren was shriller. “The Fed has no control over the main drivers of rising prices, but the Fed can curb demand by firing a lot of people and making families poorer,” Warren said at a hearing in June.
Sens. Sherrod Brown (D-Ohio) and Elizabeth Warren (D-Mass.) both sounded the alarm about the impact the Fed’s actions could have on workers.Andrew Harnik for the Washington Post via Getty Images
Rate hikes depress the economy by making borrowing more expensive, slowing spending, and eventually leading to slower price increases as demand balances supply. Powell has acknowledged that the Fed cannot control the supply issues that contribute to inflation and that cutting demand will bring some “pain” to ordinary people.
So far, the rate hikes have slowed the housing market, which is heavily dependent on borrowing, but have had no apparent impact on the broader economy. The latest data shows that inflation is as high as ever and unemployment is still at a very low 3.5%.
Powell and his colleagues are set to announce another rate hike next week, along with new projections on the likely economic impact. In September, they estimated that rate hikes would push the unemployment rate down to 4.4% next year, likely tantamount to a recession. The September estimate was half a percentage point higher than the July estimate because rate hikes over the summer did little to slow inflation.
Several Democrats expressed concern about the risks of rate hikes in a Politico article earlier this month. Sen. Chris Van Hollen (D-Md.) said it was “important that they don’t stall job recovery,” and Sen. Tina Smith (D-Minn.) said higher interest rates “wouldn’t be as effective for some.” the most significant inflationary pressure we face.” But she and other Democrats still said they thought Powell was doing a good job.
Back in June, Sens. John Hickenlooper (D-Colo.) and Ben Cardin (D-Md.) also raised concerns. “If you raise interest rates there is a significant negative impact, certainly on affordable housing,” Cardin told The Hill.
Meanwhile, Rep. Ro Khanna (D-Calif.) told CNN in early October that the Fed has been too slow to counter inflation and is now being too aggressive.
“The Fed didn’t get the blame it deserved,” Khanna said.