The Washington Post
Democrats prepare to scapegoat the Fed for their own follies
The R-word — “recession” — is suddenly everywhere. You know what that means: Time to find someone to blame. Gross domestic product has now shrunk for two consecutive quarters, according to Thursday’s report from the U.S. Bureau of Economic Analysis. This milestone doesn’t necessarily mean we’re in recession, despite Republicans’ eagerness to use the R-word ahead of the midterms. Any official recession determination would be made by an independent committee, which considers a broader set of measures besides GDP — and would most likely be announced long after the fact.
Happily, many of those metrics don’t point to recession right now. Still: The economy doesn’t feel great. Inflation-adjusted wages are falling. Voters are mad. And even if we’re not yet in recession, recession risks are rising.
Publicly, at least, President Biden and White House aides have been trying to reassure Americans that a recession isn’t in the offing. Nothing to see here, they keep saying, pointing to strong job growth as the rest of the outlook darkens.
Over in Congress, though, some Democrats have adopted a different strategy: loudly warning of an imminent recession. Rather than highlighting this risk to prepare for the possible humanitarian fallout (by, say, patching up the tattered safety net), though, they’re chiefly sounding the alarm so they can duck responsibility for the inevitable political consequences.
They don’t want to take the blame for any economic collapse. So they’re preemptively scapegoating the Federal Reserve, which raised interest rates again this week in an effort to tamp down inflation.
Sen. Elizabeth Warren (D-mass.) has warned of a “Fed-manufactured recession” and proclaimed that Fed tightening will succeed only at “getting a lot of people fired and making families poorer.” Rep. Pramila Jayapal (D-wash.) likewise carped that the Fed is jeopardizing “Biden’s promise to ‘grow the economy from the bottom up and the middle out,’ ” and admonished the central bank to “resist the urge to further raise interest rates.”
It’s true that the main risk of recession right now lies with monetary policy: In trying to get inflation under control, the Fed is tightening financial conditions, which will hopefully slow demand just enough to bring price pressures down. The Fed might accidentally tighten too much, though, and the medicine could kill the patient. It has happened before. It’s really hard to get the dosage exactly right.
So, in a sense, Democrats (among others) aren’t wrong to be worried. A recession could be very painful, particularly for the poor. (Of course, inflation is also especially painful for the poor, as Fed officials have noted.)
The problem is that the Fed is in a nearly impossible position. Inflation needs to come down soon, before it becomes deeply embedded in the economy and expectations of price growth beget even more price growth. And interest rate hikes, unfortunately, remain the most powerful tool available for achieving that goal.
Arguably, the Fed should have begun raising rates much earlier than it did. Especially because Congress chose to supercharge demand last year exactly when the economy didn’t need it — when cooped-up consumers were already sitting on piles of cash and when supply chains remained too warped by the pandemic to produce and deliver all the stuff those consumers wanted to buy.
But that’s the benefit of hindsight. Now, the Fed is playing catch-up. Which means it needs to hike rates more sharply than it would have had to if it had begun tightening sooner — or if Congress had not, say, juiced demand so much.
If Dems truly want to reduce the chances of recession, they could take some pressure off the Fed, so that snuffing out inflation doesn’t exclusively come down to monetary policy. As I’ve noted many times, Congress and the president do have some tools to (modestly) alleviate inflation.
They could, for instance, repeal the Trump-era tariffs, which Biden had criticized during the 2020 campaign. They could fix bottlenecks in the legal immigration system, which are contributing to labor shortages. They could suspend shipping restrictions that raise costs for maritime transportation of goods, including oil.
Instead, many Democrats spend their time demagoguing about dumb stuff such as “corporate greed,” which won’t affect inflation one way or the other. Worse, some are pushing policies that could juice demand further, such as tax cuts or broad-based student debt forgiveness. Some Democrats are also (mind-bogglingly) pursuing policies that might hamstring supply, such as price controls.
These kinds of steps would force the Fed to raise rates even more aggressively. Which, again, makes recession more likely. At which point these very same Dems will presumably say, “Told ya it was the Fed’s fault!”