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Cooler inflation number amplifies political pressure on Jerome Powell
A new wave of political pressure greeted Fed Chairman Jerome Powell as he and his colleagues gathered in Washington this week discuss the direction of interest rates, and a cooler-than-expected inflation reading Wednesday expanded that scrutiny.
From the left, the immediate reaction of Senator Martin Heinrich, chairman of the Joint Congressional Economic Committee, was to proclaim that “the time has come” for the Fed to lower rates “before it causes irreparable damage to the US economy.”
The sentiment was echoed earlier in the week in the form of two new cards from other liberal lawmakers pushing in the same direction. One letter, led by Senator Elizabeth Warren, concluded by telling the central banker: “You have kept interest rates too high for too long.”
The release of the Consumer Price Index (CPI) for May showed that prices remained stable compared to April and rose 3.3% year-on-year. It was good news for price-conscious consumers and could ease economic pressure on the central bank to keep interest rates high.
Pressure from the left has also been accompanied in recent days by comments from the right.
GOP presidential candidate Donald Trump again raised the prospect of removing Powell from office late last week. “I know a lot about firing people,” joked the former president in an interview with a TV station in Arizona.
But political noise from both sides may have a limited impact, at least this week.
Powell and his colleagues are expected to hold rates steady for now and then revisit the issue in July. This is partly due to the limited influence these politicians hold at the moment, but also largely due to Powell’s own design.
The central banker has long set “data-driven” benchmarks (and tried to strictly adhere to them) for avoid the fate of predecessors considered too susceptible to changing political winds.
Federal Reserve Chairman Jerome Powell looks on during a Financial Stability Oversight Council session at the Treasury Department on May 10. (ANDREW CABALLERO-REYNOLDS/AFP via Getty Images) (ANDREW CABALLERO-REYNOLDS via Getty Images)
Desmond Lachman describes Powell’s overall strategy as essentially painting himself into a corner – intentionally.
“Given the way he’s set this up, the bar will now be very high for him to cut interest rates before the election,” said Lachman, a former managing director at Salomon Smith Barney now at the American Enterprise Institute.
“That’s really the box he put himself in,” Lachman added.
There is also little these critics can do at the moment. Trump has made it clear that if he wins, Powell will be unemployed no matter what he does, but the question is whether Trump would take the destabilizing step of firing him or simply let his mandate expire.
The story continues
Mark Spindel, chief investment officer at Potomac River Capital and Fed historian, notes that both President Joe Biden and Powell would welcome the declaration of a soft economic landing, but Powell is fully committed to waiting for a consensus on the data.
“I don’t think Jay wavered in what he wanted to do, but I don’t think he wanted to get ahead of himself,” Spindel said, adding, “Certainly the window to offer political accommodation is before the election. . It’s closing fast.”
See more information: How much control does the president have over the Fed and interest rates?
Trump’s continued pressure campaign
The Fed will announce its latest interest rate decision at 2pm ET and is still widely expected to keep its rates at their highest level in 23 years, meaning there will be no near-term relief from high borrowing costs. This means the issue is likely to remain high on the political agenda.
These 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 the reason the person questioning Trump last week — ABC15 Arizona’s Rachel Louise Just — raised the issue of monetary policy during her stop in Phoenix. Trump focused on interest rates and energy prices, saying: “With me, they are going down, interest rates are going down, energy is going down.”
But Trump refused to be more specific about Powell even after repeated questions, saying he would “do whatever it takes to make America great again.”
Former President Donald Trump speaks during a town hall on June 6 in Phoenix, Arizona. (Justin Sullivan/Getty Images) (Justin Sullivan via Getty Images)
Trump has said previously, as in a 2020 press conferencethat “I have the right to remove” Powell and also signaled that he would attack any move to lower rates before the election as a political move by Powell to help Biden.
But for now, Spindel says Trump’s attacks are unlikely to change Powell’s behavior. The former president is already floating possible successors for Powell.
Pressure from the left that could grow
Influential Democrats on Capitol Hill are also ramping up the pressure with several new messages for Powell.
The first came in a letter earlier this week from Democratic Senators Warren, Jacky Rosen and John Hickenlooper. One second The letter came from Sen. Sheldon Whitehouse, chairman of the Budget Committee, and Rep. Brendan Boyle, the top House Democrat on the issue.
Senator Heinrich’s Wednesday morning statement continued the left’s pressure campaign with all messages focused heavily on housing costs as they advocated for Powell to lower rates.
“America also currently faces a housing supply crisis,” Whitehouse and Boyle wrote, continuing, “high interest rates exacerbate this supply crisis, increasing the costs of developing new housing while discouraging existing homeowners from upgrade to bigger houses.”
The case of Biden’s allies – which was repeated by a series of figuresincluding at least one former economic advisor to Trump – is that high interest rates make the inflation problem worse when it comes to housing.
In fact, Wednesday’s new data continued to show that housing was a key driver of higher underlying inflation readings.
The shelter index rose 5.4% on an unadjusted annual basis, a slight slowdown from April. The index rose 0.4% month over month and was the biggest factor in the monthly increase in base prices, according to the Bureau of Labor Statistics.
Senator Elizabeth Warren (D-MA) speaks during a Senate hearing in January. (Kent Nishimura/Getty Images) (Kent Nishimura via Getty Images)
“It’s becoming a vicious cycle where Chairman Powell attacks the housing market and comes back again and says we need more data,” charged Bilal Baydoun, director of policy and research at the left-leaning Groundwork Collaborative.
Baydoun says Powell needs to change course, but worries that won’t happen because of politics and “the fear of being seen as someone who is tipping the scales.”
Biden was more cautious, but also commented on the Fed in the context of real estate. “I bet that little device that sets interest rates is going to go down,” Biden said in a March speech while discussing mortgages.
It’s a prediction he repeated several times in the following months.
In his own statement on Wednesday morning After the latest price data, the President welcomed the “welcome progress in reducing inflation” and did not mention monetary policy.
See more information: What the Fed’s Rate Decision Means for Bank Accounts, CDs, Loans and Credit Cards
Powell’s effort to stay out of the political crossfire
Powell may be able to stay out of the political fray this week, but it could become a more difficult task as the summer progresses.
Morningstar’s chief U.S. market strategist David Sekera noted in a live Yahoo Finance interview this week that a rate cut on the eve of the September election is still a possibility and that Powell would need to signal this news to markets in July meeting.
Lachman predicts Powell will let in as little politics as possible when he speaks to reporters this week.
“I think he will ignore that” and instead focus on the technical aspects of the Fed’s work, he said. “He’s very skilled at that.”
But how Powell explains his position when it comes to the housing market will likely be closely scrutinized in the coming months.
Baydoun says Powell “needs to explain” his approach to this issue. He adds that housing is fundamental to how Americans view their future and “I’m quite confident that frustration over housing in particular will lead to greater scrutiny.”
This post has been updated with additional developments. Correction: An earlier version of this article misstated Rachel Louise Just’s name. We regret the error.
Ben Werschkul is the Washington correspondent for Yahoo Finance.
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