Democrats, worried about job losses, push back on more Fed rate hikes
Democrats are pushing back on the Fed’s decision to keep raising interest rates, warning that it could hurt the economy and lead to thousands of layoffs.
Sen. Elizabeth Warren (D-Mass.) is warning fellow Senate Democrats that 2 million Americans would lose their jobs if the Fed is successful in reaching its goal of raising the national unemployment rate by 1 percentage point.
“The Fed has already taken extreme interest rate increases. We have never seen a slope on the rate of increase like this in modern history. The Fed should take a pause,” said Warren, a longtime critic of the financial system who has repeatedly warned that interest rate hikes will hurt working-class workers.
“The Fed’s goal is to put two million people out of work. They say it more politely by saying they want to cool the economy but their own projection is that they would increase unemployment by a full point and that’s two million people” laid off, she warned.
Federal Reserve Chairman Jerome Powell announced a quarter-point hike to the Fed’s benchmark rate on Wednesday, but also acknowledged that the central bank considered pausing the increases because of instability in the banking sector.
Fed policymakers are projecting that interest rate increases will slow down this year and that rates will drop in 2024, though they’ve suggested the rates may come down more slowly than once anticipated.
Most Democrats have not joined Warren in her vociferous criticisms. President Biden, who nominated Powell to a new term, has also not betrayed any misgivings about the Fed’s policies.
The projections of job losses that Warren has pointed to, however, are starting to alarm other Democrats.
“This is a very tough decision, there are competing equities on both sides,” Senate Majority Leader Chuck Schumer (D-N.Y.) said Wednesday.
“I will say I am concerned about its effect on the economy,” he added.
Voters said the economy was their top concern ahead of the 2022 midterm election and strategists expect it will be a top issue again next year.
An Associated Press-NORC Center for Public Affairs poll published this week found that only a quarter of Americans think the national economy is in good shape or the country is headed in the right direction.
The survey found that only 54 percent of Democratic respondents under the age of 45 approve of Biden’s economic leadership, a worrying sign for the president heading into a reelection campaign that will depend on turning out young voters to the polls.
Sens. Jon Tester (Mont.) and Joe Manchin (W.Va.), two incumbent Democrats up for reelection next year, didn’t sound thrilled about the Fed’s decision to raise interest rates by a quarter-point in the midst of a banking crisis.
“I think Jay Powell’s job is to make sure we have unemployment and inflation under control and he’s looking at factors that I don’t think all of us look at a daily basis and so he’s going to do what he thinks is right,” Tester said Thursday.
“Do I think yesterday was a good time to raise .25 percent on interest rates? If it were me, I’d have probably held off, but it’s not my decision,” Tester said.
At the same time, Tester, who backed Powell’s confirmation in 2022, emphasized he did not want to politicize the Fed’s decisionmaking.
Manchin, who also backed Powell in the 80-19 confirmation vote, said the Fed’s monetary policy is a “challenging thing” and questioned the wisdom of fighting inflation by making borrowing more expensive, which in turn makes it tougher to finance the purchase of houses, vehicles and even appliances.
“I’ve thought about that in many ways. I don’t know how we can continue to try to suppress inflation by charging more, which we know has a reverse effect of what we thought,” he said.
“Did anybody think about the pressure we put on the banking system, where it could cause this type” of instability in the banking sector, Manchin asked.
Asked if he was concerned about job losses resulting from higher interest rates, Manchin said, “You’re concerned about all of that right now.”
“I’m not going to tell the Fed what to do. I’m very much concerned about what they’re going to end up doing. My recommendation is they should be very cautious of another raise right now on top of what we just had [and] the concerns we have with the banks,” he said.
The Federal Reserve reported on Thursday that banks have stepped up their borrowing from a special lending program the Fed and Treasury Department created after the failure of Silicon Valley Bank and Signature Bank to stop panic from spreading across financial institutions.
CNBC reported that institutions borrowed $53.7 billion from the Bank Term Funding Program this week, compared to the $11.9 billion they borrowed last week.
Some Democratic senators are worried the Fed has failed to fully take into account how a rapid series of interest rate increases will impact banks around the nation that, like Silicon Valley Bank, have failed to foresee how rising rates impact their capital and liquidity ratios.
One Senate aide argued that even if Congress had not rolled back the 2010 Dodd-Frank Wall Street Reform Act in 2018 and Silicon Valley Bank had been required to undergo a Fed stress test, it would have passed because such a test does not account for rapidly rising treasury yields, which in turn reduces the mark-to-market value of their liquid reserves.
“Before the crisis in several banks, I was worried that the Fed was going to raise interest rates by 50 basis points and I was nervous that would definitely overshoot in terms of the economy, that it would suppress economy growth and create unemployment,” said Sen. Chris Van Hollen (D-Md.), who explained he was relieved the Fed didn’t go that far on Wednesday.
“I do think this is a moment now to pause to make sure that they don’t overshoot,” he said.
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