Discontent with the Federal Reserve is brewing among Democrats, even those who voted earlier this month to confirm Fed chairman Jerome Powell for another four-year term.
With inflation at 40-year highs and the prospect of a recession looming large over midterm elections later this year, Democrats are worried the economy could cost them their majorities.
And the feeling in the party is that if the Fed had acted quicker, Democrats might not be facing such tough headwinds.
Specifically, Democrats say the Fed started raising interests too late following the onset of the pandemic, missing an opportunity to curb the inflation that’s weighing on Democratic hopes for reelection.
“I recall urging the Fed late last fall that they would start needing to ratchet these rates up. I wish they would have done earlier,” said Sen. Mark Warner (D-Va.).
Sen. Richard Blumenthal (D-Conn.) voiced similar consternation.
“The Federal Reserve is not clairvoyant, nor is its judgment foolproof. It might have acted earlier,” he said. “Hopefully now its actions will have a very effective impact in stopping inflation.”
If Warner’s and Blumenthal’s criticisms of the Fed seems measured, there is a logical explanation.
Both voted to confirm Powell to another term in an 80-19 vote on May 12 after President Biden nominated the Republican to a second term.
Only five Democrats and Independent Sen. Bernie Sanders (Vt.), who caucuses with Democrats, voted against Powell. The other “no” votes were Republicans.
That makes it tougher for Democrats to criticize Powell and the Fed.
The idea that the Fed acted too late to raise interest rates to lower inflation has support among a chorus of economists, who say it was overly stimulative and too focused on propping up demand deep into the pandemic even as deeper issues affecting supply chains went unaddressed.
Starting in March 2020, as the economy locked down with the coronavirus, the Fed dropped interest rates to 0.05 percent while purchasing securities that would end up more than doubling its balance sheet. These stimulative measures continued as the federal government undertook its own fiscal stimulus programs, with $1,200 checks going out under the Trump administration and $1,400 checks going out under the Biden administration.
Republicans have blamed those checks for making inflation worse. The GOP expects it will ride high inflation to ballot box victories in November that could deliver Republican-majority chambers of Congress.
The GOP argument is getting some backing from economists who see the stimulus from Congress, the administration and the Fed as having had a snowball effect upon inflation.
“In 2021, there had already been a huge stimulus package, and Biden added another $2 trillion, or to be precise, $1.9 trillion or 8 percent of GDP. Powell should have been beginning to put on the brakes, if not in March of 2021 when Biden introduced that package, then at least a few months later,” Desmond Lachman, an economist with the right-leaning American Enterprise Institute, a Washington think tank, said in an interview.
“Instead, he kept interest rates at zero and kept flooding the market with liquidity, so he set us up and played a big role in getting the high inflation,” he said.
To bring inflation down, the Fed increased interest rates earlier this month by half a percent, or 50 basis points, to 0.83 percent, saying it “anticipates that ongoing increases in the target range will be appropriate.”
The interest rate hikes have hit stock markets hard, with some either in or near bear territory that represents a 20 percent fall from peaks.
The deeper worry is that the rising interest rates could lead to a recession, though a number of economists think that is unlikely until at least 2023. The Fed is hoping it can tame inflation without triggering a recession.
Not all Democrats have been behind Powell. Sens. Jon Ossoff (Ga.), Ed Markey (Mass.), Jeff Merkley (Ore.), Elizabeth Warren (Mass.) and Bob Menendez (N.J.) joined Sanders in opposing his confirmation, despite the nomination by their party’s president.
“I like and respect Chairman Powell. But 8.3 percent inflation is hurting my constituents a year after the Fed predicted inflation was ‘transitory,’” Ossoff said earlier this month.
“The Fed persisted in massive quantitative easing even after it was clear inflation was worse than forecast,” he said. “These are policy errors that have worsened inflation and hurt low-income people the most. I recognize that Chairman Powell has a difficult job in challenging times, and I sincerely hope for his success in his second term.”
There are also Democrats who appear willing to give Powell the benefit of the doubt.
Some view the global economic picture as a product of the pandemic and beyond the remit of any one central bank or lawmaking body.
“Let’s be honest, it was a unique situation, the American economy and many others around the world basically shut down because of the pandemic,” Sen. Dick Durbin (D-Ill.) said.
“And you saw retrenching of consumer demand, and now the opposite is the case,” he added. “People are more optimistic, consuming more, and their consumption is outpacing production, and that leads to inflation. So it’s great to have so many people at work and low unemployment, but it just feeds the fires of inflation. It’s a tough situation, fairly unique in our history.”