A new wave of political pressure greeted Fed Chairman Jerome Powell as he and his colleagues gathered in Washington this week to discuss the direction of interest rates and a cooler-than-expected inflation reading on Wednesday. reinforced that consideration.
From the left, the immediate reaction from Senator Martin Heinrich, the chairman of the Joint Economic Committee of Congress, was to declare “it is time” for the Fed to cut rates “before it causes irreparable damage to the American economy”.
The sentiment was echoed earlier this week in the form of two new letters from other Liberal lawmakers pushing in the same direction. A letter, led by Sen. Elizabeth Warren concluded by telling the central banker, “You’ve kept interest rates too high for too long.”
The release of the Consumer Price Index (CPI) for May showed that prices remained unchanged during April and rose 3.3% compared to last year. It was good news for price-weary consumers and could ease economic pressure on the central bank to keep interest rates high.
Pressure from the left has been compared in recent days with comments from the right.
GOP presidential candidate Donald Trump again raised the possibility of firing Powell late last week. “I know a lot about firing people,” the former president teased in an interview with an Arizona television station.
But political noise from both parties may have limited impact, at least for this week.
Powell and his colleagues are widely expected to hold rates steady for now and then revisit the issue in July. This is partly due to the limited leverage these politicians currently have, but also in large part by Powell’s own design.
The central banker has long set “data-driven” benchmarks (and tried to stick to them) to avoid the fate of predecessors seen as too sensitive to changing political winds.
Desmond Lachman described Powell’s overall strategy as essentially backing himself into a corner—deliberately.
“Given the way he’s framed this, the bar will be too high for him now to cut interest rates before the election,” said Lachman, a former managing director at Salomon Smith Barney who is currently at the American Enterprise Institute.
“That’s really the box he’s put himself in,” Lachman added.
There is also little critics can do at the moment. Trump has been clear that if he wins, Powell will be out of a job no matter what he does. But the question is whether Trump would take the destabilizing step of impeaching him or simply let his term expire.
Mark Spindel, a Fed historian and chief investment officer of Potomac River Capital, noted that both President Joe Biden and Powell would welcome the announcement of a soft economic easing, but Powell is fully committed to waiting for a consensus on data.
“I don’t think Jay has wavered in what he wants to do, but I don’t think he wanted to get nearly ahead of himself,” Spindel said, adding, “Certainly the window to offer policy accommodation before the election is closing fast. “
Read more: How much control does the president have over the Fed and interest rates?
Trump’s ongoing pressure campaign
The Fed will announce its final interest rate decision at 2pm ET and is still widely expected to keep rates at a 23-year high. This means there will be no short-term relief from high borrowing costs and the issue is likely to remain at the top of the political agenda.
Those high costs — especially for getting a mortgage — are why many in the political world are pushing for faster action by the Fed to lower rates.
Housing is why Trump’s questioner last week — ABC15 Arizona’s Rachel Louise Just — brought up monetary policy during his time in Phoenix. Trump focused on interest rates and energy prices, saying, “With me, they’re going down. Interest rates are going down. Energy is going down.”
But Trump declined to be more specific about Powell even after repeated questions, saying he would “do whatever it takes to make America great again.”
Trump has previously said, such as at a 2020 press conference, that “I have the right to fire” Powell and has also signaled that he would attack any move to cut rates before the election as a political move by Powell to help Biden.
But for now, Spindel said Trump’s attacks are unlikely to change Powell’s behavior. The former president is already fielding potential successors to Powell.
Pressure from the left that may increase
Influential Democrats on Capitol Hill are also ramping up the pressure with multiple new messages for Powell.
The first came in a letter earlier this week from Democratic Sens. Warren, Jacky Rosen and John Hickenlooper. A second letter came from Sen. Sheldon Whitehouse, chairman of the Budget Committee and Rep. Brendan Boyle, the House’s top Democrat on the issue.
Senator Heinrich’s Wednesday morning statement continued the pressure campaign from the left, with messages heavily focused on housing costs as they targeted Powell for lowering rates.
“America is also currently facing a housing supply crisis,” write Whitehouse and Boyle, continuing, “high interest rates exacerbate this supply crisis by raising the costs of developing new housing while discouraging existing homeowners. from upgrading to bigger houses.”
The case from Biden allies — which has been echoed by a number of figures, including at least one former Trump economic adviser — is that high interest rates exacerbate the inflation problem when it comes to housing.
Indeed, new data on Wednesday continued to show that housing was a key driver of higher core inflation readings.
The housing index rose 5.4% on an unadjusted annual basis, a slight slowdown from April. The index rose 0.4% month-on-month and was the biggest factor in the monthly increase in core prices, according to the Bureau of Labor Statistics.
“It’s becoming a vicious cycle where Chairman Powell hits the housing market and comes back and says we need more data,” charged Bilal Baydoun, director of policy and research at the left-leaning Groundwork Collaborative.
Baydoun said Powell should reverse course but worries he won’t because of politics and “fear of being perceived as tipping the scales.”
Biden has been more cautious, but has also commented on the Fed in the context of housing. “I bet that little outfit that sets interest rates is going to come down,” Biden said in a speech in March while discussing mortgages.
It’s a prediction he’s repeated several times in the months since.
In his statement Wednesday morning after the latest price data, the president cheered “welcome progress in reducing inflation” and did not mention monetary policy.
Read more: What the Fed’s Rate Decision Means for Bank Accounts, CDs, Loans and Credit Cards
Powell’s effort to stay out of the political fray
Powell may be able to stay out of the policy fray this week, but it could become a tougher job as the summer progresses.
Morningstar’s chief U.S. market strategist, David Sekera, noted in a Yahoo Finance video interview this week that a rate cut ahead of the September election is still very likely, and that Powell should tell him so market news at the July meeting. .
Lachman predicted that Powell will allow as little politics as possible when he speaks to reporters this week.
“I think he’s going to ignore it” and instead focus on the technical aspects of the Fed’s work, he said. “He’s pretty good at it.”
But how Powell explains his position when the subject turns to the housing market is likely to be closely scrutinized for months to come.
Baydoun said Powell “needs to explain” his approach to the issue. He added that housing is central to how Americans see their future, and “I’m pretty sure that frustration over housing in particular will lead to more scrutiny.”
This post has been updated with additional developments. Correction: An earlier version of this article misstated Rachel Louise Just’s name. We are sorry for the mistake.
Read more about the May CPI report and inflation:
Ben Werschkul is a Washington correspondent for Yahoo Finance.
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