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The Fed’s rocky new dynamics (Axios)

30 July 2022

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Axios Markets title: The Fed’s rocky new dynamics
By: Neil Irwin and Courtenay Brown
Date: 25 July 2022

A new attack on the Federal Reserve from Sen. Elizabeth Warren is an early sign the central bank faces a rocky path ahead in navigating politics.

  • It will simultaneously face the music for allowing high inflation to take hold and for the economic pain resulting from its efforts to bring down prices.

Why it matters: The Fed has left itself in a precarious position with lawmakers and the public amid soaring inflation and a newly aggressive game of catch-up that risks a recession.

Driving the news: Warren writes in a Wall Street Journal op-ed that the Fed’s rate-hiking campaign — including another 0.75 percentage point expected Wednesday — “risks triggering a devastating recession.”

  • “Unfortunately, the Fed has seized on aggressive rate hikes—a big dose of the only medicine at its disposal—even though they are largely ineffective against many of the underlying causes of this inflationary spike,” Warren writes, citing short supplies of energy and food due to the Ukraine war.

Between the lines: The Biden administration has been content to put the Fed front and center in its messaging on inflation, extending deference to the central bank as the government’s primary inflation fighter.

  • Warren is speaking for many on the left who are less-than-thrilled with this approach. They fear the Fed’s aggressiveness will mean lower-wage workers bear the brunt of tightening — and could prove an early sign of things to come.

Chair Jerome Powell has managed generally good relationships with the Biden administration, and with both sides of the aisle on Capitol Hill. He secured 80 Senate confirmation votes for a second term just two months ago.

  • If anything, the criticism has come from Republicans and a handful of Democrats who blame Powell and the Fed for not acting sooner to rein in inflation.

Yes, but: Things can change quickly. If the economy indeed falls into a recession, elected officials may clamor for easier money, and it’s plausible the Fed will respond.

  • It would be an inversion of the 2010s era, when the Fed took political heat for its low interest rate policies.
  • Look for interest rate-sensitive industries like real estate to squawk loudest as higher rates start to cause pain.

Flashback: Part of the Fed’s lore is linked to the early 1980s under chair Paul Volcker, when the central bank engineered a deep recession that succeeded in bringing down inflation.

  • But high interest rates also spurred a public outcry, including protests by farmers on tractors at the Fed’s Foggy Bottom headquarters and pieces of 2×4 lumber mailed in by angry construction interests.

The bottom line: The slowing economy will put the Fed in new political crosshairs.”


Source:
https://www.axios.com/newsletters/axios-macro-e2e634fb-daf4-46e5-aaaa-c645e7f142fd.html

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