(Bloomberg) -- The Federal Reserve is getting an early taste of the next two years as Democratic lawmakers warn it against pushing the US economy into recession via its massive interest-rate hikes.
With the central bank preparing to boost rates again Wednesday and Americans voting in midterm congressional elections Nov. 8, Senate Banking Committee chief Sherrod Brown of Ohio and Colorado Senator John Hickenlooper last week publicly lobbied Chair Jerome Powell to exercise restraint.
Their voices, which joined Massachusetts Senator Elizabeth Warren in cautioning on rate hikes, represent rare pressure from the party of President Joe Biden. He has made an explicit point of avoiding criticizing the Fed and stressing its independence -- a sharp contrast to his predecessor, Donald Trump, who repeatedly disparaged Powell in public for tightening policy.
But Democrats now face voters angry over high inflation, which the Fed concedes it was slow to spot while acknowledging that the cost of that error will likely be rising unemployment as it hikes aggressively to cool price pressures. Investors expect it to move by another 75 basis points at this week’s meeting for the fourth time in a row.
Rising unemployment will open the door for more attacks from Democrats on Capitol Hill, and perhaps even Biden’s White House, as the 2024 presidential election nears.
“Blaming the Fed is sort of old hat for lawmakers,” said Sarah Binder, a professor at George Washington University and senior fellow at the Brookings Institution.
In the past, “the sharpness of the attacks on the Fed often came from both sides of the aisle but today, national politics are just so much more partisan that the Democrats’ incentive is to blame the Fed and the Republican incentive to blame the president,” she said.
Former US Treasury Secretary Lawrence Summers is already warning fellow Democrats against using Powell and his colleagues as a political football. The Harvard professor told Bloomberg Television, for whom he’s a paid contributor, it’s a “fool’s game” that could push Powell to prove his independence by staying tight.
“The Fed is not partisan at all, they’re political in the sense that they work for Congress and the American people,” said Marc Sumerlin, founder of Evenflow Macro in Washington and a former adviser to President George W. Bush.
“Right now the American people are really upset about inflation. If the American people shifted to more concerns about job losses than inflation, then that’s something they might react to,” he said.
While the central bank’s all-in strategy to bring down inflation has already reverberated through parts of the economy -- surging mortgage rates have cooled the housing market and stocks are down around 18% this year, it hasn’t yet hit the still-tight jobs market.
Unemployment is 3.5% -- a more than half-century low -- and employers, while showing some signs of slowing down hiring, are still adding hundreds of thousands of workers to their payrolls every month.
But weakening the labor market is the Fed’s main conduit for curbing the demand that’s helping keep prices high, and some Democrats are reminding Powell and his colleagues that they have a dual mandate: price stability and maximum employment.
“We must avoid having our short-term advances and strong labor market overwhelmed by the consequences of aggressive monetary actions to decrease inflation, especially when the Fed’s actions do not address its main drivers,” Brown wrote in an Oct. 25 letter.
Hickenlooper separately urged Powell to pause the hiking campaign. And their colleague Warren has for months been rebuffing aggressive Fed tightening, arguing the forces driving inflation are largely outside of the Fed’s control and rapid rate hikes will cause a recession.
For Republicans, blaming the White House and their Democratic counterparts in Congress has so far been politically advantageous, something that’s unlikely to change as the political focus turns to the 2024 presidential race.
“It’s much more politically helpful for Republicans in the long run up to the elections to pin the blame on Biden and thus pin the blame on the president’s party, particularly given how close the Republicans are to capturing control of the House and Senate,” said Binder, who has written a book about the Fed and Congress.
The Fed has helped its own case in putting forward a very unified message about its inflation fight. All of the 19 policymakers that make up the rate-setting Federal Open Market Committee -- including policymakers picked by Biden as well as Trump -- have said they’re committed to bringing down inflation.
And some officials have spoken recently about the importance of watching incoming data carefully so that the Fed doesn’t overdo it and cause unnecessary harm.
The central bank’s ability to hit a “soft landing” -- as it calls its mission to bring down inflation without driving the economy into a recession -- will be paramount to the 2024 presidential campaigns, which effectively get going next year.
Fed officials forecast inflation falling next year with unemployment rising modestly, to 4.4%. If that’s how it plays out –- and critics are skeptical the central bank can reduce prices without causing the jobless rate to rise further, the Fed could fade from sight in the political fray.
Bank of America Corp (NYSE:BAC). analysts say that in the past 16 rate hiking cycles since 1954, the average unemployment rate when the Fed hiked for the last time was 5.7%.
“If you can get core inflation down from 6.6% to 2.4 or 2.3 by late ‘23, which I think is doable, that takes one sort of weapon away,” said Omair Sharif, founder and president of Inflation Insights.
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