Sen. Elizabeth Warren (D-MA) tore into Federal Reserve Chairman Jerome Powell, accusing him of threatening to undermine the economy with his efforts to curb inflation by raising interest rate targets.
Warren, one of Powell’s most vociferous opponents, argued against the Federal Reserve’s increasingly hawkish monetary policy in a Wall Street Journal op-ed. She pointed out that the economy has experienced a robust labor market for the past year or so and said that the central bank’s aggressive rate hikes could trigger a “devastating recession.”
“As with any illness, the right medicine starts with the right diagnosis,” Warren wrote. “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.”
The Fed has embarked upon a historic rate-hiking cycle to contain the country’s explosive inflation, which is the highest it has been in four decades.
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Last month, the central bank raised its interest rate target to three-fourths of a percentage point — a hike that is essentially akin to three normal rate hikes at once. The Fed is set to meet on Tuesday and Wednesday and is expected to jack up rates at the same aggressive pace once more, showing the emphasis Fed officials are placing on reining in prices.
Raising interest rates slows demand, which can lead to an economic downturn or a recession. Warren contended that while tamping down inflation is important, the root causes of the higher prices are not within the Fed’s control and Powell is addressing the problem too forcefully at the risk of tanking the economy.
“Inflation is a global phenomenon inflicting significant financial pain on families everywhere. Rising costs are an urgent problem, and interest rates play a key role in maintaining price stability,” she wrote. “But urgency is no excuse for doubling down on a dangerous treatment.”
Inflation as measured by the consumer price index was a whopping 9.3% in the 12 months ending in July — more than anticipated. Rising energy prices accounted for half of the total inflation, with the gasoline index rising a whopping 11.2%.
Warren argues that Powell’s rate hikes have little to do with energy prices, granted that much of the problem with higher fuel prices is a result of the war in Ukraine and supply chain issues.
The Democratic senator also blamed the higher prices on “corporate monopolies,” an argument that most economists have discounted in explaining the current inflation.
In the op-ed, Warren also took a swing at former Treasury Secretary Larry Summers, a Democrat who has been ringing the alarm bells about inflation for more than a year and was one of the few economists who correctly predicted just how severe the problem could get.
Summers, who served as treasury secretary under President Bill Clinton and director of the National Economic Council under President Barack Obama, recently stoked controversy for discussing how the unemployment rate might have to soar in order to contain the explosive price increases.
“We need five years of unemployment above 5% to contain inflation — in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment,” Summers recently told the London School of Economics.
Warren attacked the claim as callous and out-of-touch. She said that it was the comment of someone who “has never worried about where his next paycheck will come from.”
“If Messrs. Powell and Summers have their way, the resulting recession will be brutal,” she said, tying Powell, a Republican, with the economist. “As in past downturns, Republicans in Congress will press for austerity — tax cuts for giant corporations and the rich, weaker regulation on big businesses, and little economic support for the most vulnerable.”
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A recession is often explained as two quarters of negative economic growth. The economy contracted at a 1.6% annual rate in the first quarter. The Atlanta Fed’s “GDP Now” tracker is predicting that gross domestic product growth will decline for a second straight quarter.
The initial report on second-quarter GDP growth will be released by the Bureau of Economic Analysis on Thursday. The consensus among forecasters is it will show positive 0.5% growth, a forecast that has been downgraded over the past several weeks.
