A new wave of political pressure greeted him this week as Federal Reserve Chairman Jerome Powell and his colleagues gathered in Washington to discuss the direction of interest rates, and weaker-than-expected inflation readings released on Wednesday further intensified that scrutiny.
On the left, Senator Martin Heinrich, chairman of the Joint Committee on Economic Affairs, responded immediately, declaring that “the time has come” for the Fed to cut interest rates “before irreparable damage is done to the U.S. economy.”
Those sentiments were echoed earlier this week in two new letters from other liberal lawmakers arguing in the same direction. One, led by Sen. Elizabeth Warren, concluded that the central bank governor had “kept interest rates too high for too long.”
The release of the Consumer Price Index (CPI) for May showed prices were unchanged from April, rising 3.3% year-on-year, which is good news for price-weary consumers and could ease economic pressure on central banks to keep interest rates high.
Pressure from the left has been compounded in recent days by commentary from the right.
Republican presidential candidate Donald Trump again suggested over the weekend that he might fire Powell. “I know a lot about firing people,” the former president said in an interview with an Arizona television station.
But for this week at least, the impact of political noise from both sides may be limited.
Powell and his colleagues are widely expected to leave rates on hold for now and revisit the issue in July, partly because of the limited influence these politicians have at the moment, but also because of Powell’s own plans.
Central bank governors have long set (and tried to follow rigorously) “data-driven” standards to avoid suffering the same fate as their predecessors, who were perceived to be vulnerable to political shifts.
Desmond Luckman described Powell’s overall strategy as essentially shooting himself in the foot.
“Given Trump’s policy preferences to date, the bar for cutting interest rates before the election will be very high,” said Luckman, a former managing director at Salomon Smith Barney who is now with the American Enterprise Institute.
“That’s exactly the box he puts himself in,” Lachman added.
There’s little critics can do at this point. Trump has made clear that if he wins, Powell will lose her job no matter what he does. But the question is whether he will take the destabilizing step of firing her or just let her finish out her term.
Mark Spindell, a Federal Reserve historian and chief investment officer at Potomac River Capital, noted that both President Joe Biden and Chairman Powell would welcome a declaration of a soft landing for the economy, but that Powell is committed to waiting for an agreement on data.
“I don’t think Jay is uncertain about what he wants to do, but I don’t think he wants to get ahead of himself,” Spindell said, adding that the window of opportunity to offer some policy relief before the election is certainly closing.”
read more: How much control does the President have over the Fed and interest rates?
President Trump’s ongoing pressure campaign
The Federal Reserve will announce its latest interest rate decision at 2 pm ET and is widely expected to keep rates at their highest in 23 years, meaning soaring borrowing costs will not ease anytime soon and the issue is likely to remain at the top of the political agenda.
These high costs, particularly those involved in obtaining a mortgage, are why many across the political spectrum are calling for the Fed to act more quickly to lower interest rates.
When ABC15 Arizona’s Rachel Louise Just questioned President Trump last week, it was because of the housing issue that he mentioned monetary policy during his visit to Phoenix. President Trump focused on interest rates and energy prices, saying, “For me, interest rates go down. Interest rates go down. Energy goes down.”
But Trump refused to be more specific about Powell despite repeated questioning, saying he would “do whatever it takes to make America great again.”
President Trump has previously said at a press conference in 2020, “I have the right to fire Chairman Powell,” suggesting that he would criticize the pre-election interest rate cut as a political move by Chairman Powell to support Biden.
But for now, Spindell said Trump’s attacks are unlikely to change Powell’s attitude, and the former president has already floated candidates to replace him.
Pressure from the left is likely to intensify
Influential Democrats in Congress are also stepping up pressure on Powell with several new messages.
The first letter was issued earlier this week by Democratic Senators Warren, Jacky Rosen and John Hickenlooper. The second letter was issued by Senator Sheldon Whitehouse, chairman of the Budget Committee, and Representative Brendan Boyle, the top House Democrat on the issue.
Senator Heinrich’s statement on Wednesday morning continued the pressure campaign from the left, with his message focusing on home prices as he pleads with Chairman Powell to lower interest rates.
“America also currently faces a housing supply crisis,” Whitehouse and Boyle wrote. “High interest rates exacerbate this crisis by making it more costly to develop new housing while simultaneously discouraging existing homeowners from upgrading to larger homes.”
The argument from Biden’s allies, and one that has been repeated by a range 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 showed that housing continued to be the main driver of the rise in core inflation.
The housing index rose 5.4% year-on-year on an adjusted basis, slowing slightly from April. The housing index rose 0.4% from the previous month, the largest driver of the monthly increase in core prices, according to the Bureau of Labor Statistics.
“This is becoming a vicious cycle of Powell sharply criticizing the housing market and then coming back and saying we need more data,” said Bilal Beydoun, policy and research director at the left-leaning Groundwork Collaborative.
Beyden said Powell needed to change course but feared she would not do so for political reasons and “fear of being seen to turn the tables.”
Biden has taken a more cautious stance, but has also commented on the Fed in relation to the housing crisis. “That little institution that sets interest rates is going to collapse,” he said of mortgages in a March speech.
He repeated this prediction many times over the following months.
In a statement released Wednesday morning following the latest price data, the president hailed “welcome progress towards containing inflation” but made no mention of monetary policy.
read more: How Federal Reserve interest rate decisions affect bank accounts, CDs, loans, and credit cards
Powell has tried to stay out of the political fray.
While Powell may be able to distance herself from the political fray this week, her job could get tougher as the summer progresses.
A rate cut remains likely on the eve of the September election, and Powell would need to give the market that news at the July meeting, David Sekera, chief U.S. markets strategist at Morningstar, said in a video interview with Yahoo Finance this week.
Lachman predicted Powell would keep politics to a minimum when he speaks to reporters this week.
“He’ll ignore that” and instead focus on the technical aspects of the Fed’s operations, he said. “He’s pretty skilled at that.”
But how Powell explains his position as the conversation turns to the housing market is likely to come under intense scrutiny in the coming months.
Beyden said Powell “needs to explain” his approach to the issue, adding that housing is fundamental to how Americans see the future and that “I’m pretty confident that dissatisfaction with housing in particular will lead to more scrutiny.”
This post has been updated to reflect additional developments. Correction: An earlier version of this article misstated Rachel Louise Just’s name. We apologize for this error.
For more information on the May CPI report and inflation, see below.
Ben Warschle is Washington correspondent for Yahoo Finance.
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