This Monday, Democratic senators wrote a letter to the Fed chief urging him to cut interest rates because tight monetary policy is holding back the economy and is not helping to beat “the remaining key drivers of inflation.”
The economic data calendar appears to have made some officials nervous. Specifically, the downward revision of Q1 US GDP from 1.6% to 1.3% QoQ and the increase in average hourly earnings to +0.4% MoM versus a forecast of +0.3%.
The letter goes on to argue that lower rates will ease the costs of renting, home buying, and construction, thereby reducing overall price pressures. However, no one seems concerned about when these effects will materialize.
The letter ends with the following statement: “ You’ve kept interest rates too high for too long; it is time to cut rates.”
If the Fed were to lower rates without being convinced that inflation is under control, the country may not plunge into stagflation as in the 1970s, but price growth will certainly not slow down. In fact, it could accelerate, as happened in Turkey.
Why are politicians meddling in the Fed's work?
First, the US presidential election is approaching, and Biden still trails Trump by 0.9% in the polls. Not even the prospect of the former president being sentenced to prison on July 11 unsettled voters.
Second, there is the fear of new bankruptcy filings and the resulting crises. In May, S&P Global recorded 62 new bankruptcy filings. The 275 bankruptcy filings in 2024 almost match last year's 277. And that's not the worst of it.
Moody's recently warned that it could downgrade six U.S. banks due to problems in the commercial real estate sector. The main risk is that this will trigger a chain reaction, as happened with Silicon Valley Bank a year ago.
Will Powell bow to pressure from senators?
Rather no than yes. With pro-inflationary pressure mounting, the Fed chief will, at best, keep his rhetoric tightening. At worst, the dot plot of rate forecasts will be revised downward, which will be a nasty surprise to markets.
However, Powell may be held to account in the future for why rates have remained high for so long. The obvious answer would be that pouring billions of dollars into the economy during the pandemic did not quickly curb inflation.