Democrats are starting to feel good about the economy’s direction, with a five-month downward trend in prices and less aggressive action on interest rates signaling a possible change in fortunes.
“I think we’re in a better moment, I think we’re in a better moment,” said Sen. Jon Tester (D-Mont.), who sits on the Banking Committee, on Wednesday, cautioning that “inflation is [something] we still need to be dealing with.”
Democratic moderate Joe Manchin (W.Va.), who has broken several times with his party on legislative initiatives related to the economy, agreed: “We’re going in the right direction.”
While Democrats have been emphasizing the strength of the economy just as Republicans have been playing up its weaknesses, both parties are recognizing some improving conditions.
House Energy and Commerce Committee member Rep. Brett Guthrie (R-Ky.) bemoaned only the timing.
“Decreasing inflation is always good, I just wish it was where it was before President Biden took office,” he said.
“It is slowly moving in the right direction,” Mike Rounds (R-S.D.), a member of the Senate Banking Committee, said about inflation in an interview. “But the reality is that this is a policy-induced issue, and policy is what should change it.”
Amid widespread warnings of a recession in 2023 and a loss of jobs that could come along with it, the Department of Labor announced Tuesday that companies were charging prices that were 7.1 percent higher for consumers in November than they were the November prior. That’s still near a decades-long high, but it’s down from 7.7 percent in October and from 9.1 percent in June.
“7.7 [percent inflation] to 7.1 is pretty good,” Manchin said Wednesday.
As a result, the Federal Reserve slowed the pace of its rate hikes on Wednesday for the first time since it started raising them in March, adding 50 basis points to the federal funds rate instead of 75 as it did in its last four meetings.
“The Fed – God bless them – they were AWOL for much of last year in the run up to the end of summer, and then they got religion and have behaved admirably,” said Senate Finance Committee member Tom Carper (D-Del.) in an interview.
Carper said the week’s inflation numbers “are very encouraging” and indicate “we’re on the right track.” He noted job growth remains strong.
But Democrats are not in complete agreement on how the Fed should proceed.
Asked if the Fed should stop raising interest rates at its next meeting, Tester indicated he thought the central bank would keep going, pressing ahead toward a revised median target rate of 5.1 percent next year.
“I talked to [the Federal Reserve chair] last week, and they’re not intending to do anything unless something changes dramatically for some time,” he said.
“The Fed’s got to do their job. They were slow coming out of the gate, and they’re doing their job now,” Manchin added.
Other Democratic lawmakers have said they think it’s time for the Fed to stop raising rates altogether so as not to risk a recession.
“I think the Fed should stop raising rates,” Ted Lieu (D-Calif.) said Wednesday. “What you saw was a surge in inflation because of the pandemic. And now that the pandemic has waned and the United States and countries around the world are getting supply chains back up and running, and now that we have very few countries that have any sort of pandemic restrictions except for China, we’re in a place where we don’t need any more rate hikes.”
Republicans have been critical of U.S. economic performance during the pandemic, calling attention to how economic stimulus packages passed by the Democratic-controlled Congress likely increased demand for goods just as faltering supply chains made them harder to get.
“I think the Fed has done, in my opinion, the only thing they can do with a very blunt-force instrument, which is interest rates. I think they’re probably going to continue for a while,” Rounds said.
A top concern for economists now is whether the Fed’s increasing interest rates, which are intended to slow demand by making it more expensive to transact throughout the economy, will end up triggering a recession.
Predictions about a severe recession reached a fever pitch over the summer, and contractions in gross domestic product during the first two quarters led many Americans to believe a recession had already begun.
But some market commentators have started softening their language, with some lawmakers following suit.
“I think we’re going to have a recession next year but it’s going to be very shallow and it won’t be more than two quarters,” Senate Finance Committee member Chuck Grassley (R-Iowa) said Wednesday, echoing recent comments by Bank of America CEO Brian Moynihan who said he was anticipating a “mild recession” in 2023.
Other segments of the banking industry have also been telling Congress that the economy is holding up.
“I met with some CEOs of some banks recently. They say that notes are performing well, there’s no red flags that are shocking the banking community right now to signal any downturn in the economy. I know you hear pundits on TV talking about it, but the fact is our economy is humming,” House Financial Services Committee member Rep. Vincente Gonzalez (D-Texas) said on Wednesday.
Gonzales said that banks are not seeing much in the way of credit card defaults, which are one of the first signs of an economic downturn.
“One thing they did mention is that people who were in trouble prior to the pandemic are now going back to borrowing money. And they saw that maybe some of the people with lower credit ratings are the first people who seem to be [getting] some small loans across the country,” he said.
Economists say they’re anticipating continued spending from consumers, which should also help to stave off a recession.
“The labor market continues to be very strong with employment rising and [workers] seeing healthy (perhaps too healthy) wage gains. With inflation slowing, workers have rising real wages, which they will largely spend,” Dean Baker, an economist with the Center for Economic Policy and Research, wrote in an email to The Hill.
“With strong consumption, strong investment and rapidly falling inflation, that all looks like a pretty good picture, unless the Fed goes nuts with rate hikes.”