Democrats warn Fed’s rate hikes may trigger recession

Senate Democrats are calling on the Federal Reserve to proceed cautiously on raising interest rates when board members meet this week, warning that fighting inflation too aggressively could hurt the economy.

Gross domestic product (GDP) data for the second quarter will be published this week and is expected to show a contraction in growth.

But Democrats in Congress are adopting the administration’s talking points to argue that two quarters of negative growth does not necessarily signal a recession, pointing to the strong labor market and rising wages, even if those positive developments are overshadowed by inflation.

“The economy is strong but if Fed Chair [Jerome] Powell continues these unprecedented aggressive rate increases, he could push it straight into recession,” said Sen. Elizabeth Warren (D-Mass.). “I’ve talked to colleagues. I’ve also talked with economists who are increasingly speaking out.”

“There’s a reason the Fed acts independently in our system but it’s critical that Jerome Powell think about the implications of knocking millions of people out of work,” she said.

Warren warned in a Wall Street Journal op-ed Sunday that “the Fed risks triggering a devastating recession” by raising interest rates too far too fast to fight inflation.

 She argued that supply-chain problems are a bigger cause for inflation than interest rates and predicted that aggressive rate hikes would be “largely ineffective against many of the underlying causes of this inflationary spike.”

Other Democrats are voicing the same concerns.

“I constantly worry that they are making such big jumps,” Sen. John Hickenlooper (D-Colo.) said of the Federal Reserve. “These interest rates have long-term effects in terms of people building infrastructure and making long-term investments.”

“If they were to ask my advice, I might suggest that they only raise it a half or a quarter [point],” he said.

Senate Budget Committee Chairman Bernie Sanders (I-Vt.), a leading progressive, said Tuesday that he agrees with Warren and other Democrats who are urging the Fed not to raise rates too aggressively.

Federal Reserve board members will wrap up their two-day meeting on Wednesday, after which they are expected to announce a 0.75 percentage point interest rate hike.

It will be the fourth Fed rate hike of the year, bringing rates to between 2.25 percent and 2.5 percent.

The Fed projected last month that it would raise rates to 3.4 percent by the end of the year, which means that rate increases are also expected in September, November and December.

The central bank is under pressure to act boldly after the Bureau of Labor Statistics announced that inflation had jumped 9.1 percent in June compared to the year before.

But the three rate increases announced earlier this year already appear to be having an effect on the economy.

The 30-year fixed mortgage rate hit 5.5 percent in July, sending demand for new mortgages to a 22-year low.

Several major companies have announced layoffs or hiring slowdowns in recent weeks, including Facebook, Tesla, Shopify, Apple, Lyft and Google.

“Interest rates are a multi-edged sword, they have multiple impacts and [can be] very damaging on certain elements of our economy,” said Sen. Ben Cardin (D-Md.).

“We’ve had some discussions about affordable housing. It absolutely directly impacts affordable housing, housing stock,” he said. “When you raise interest rates it has a major negative impact, certainly on affordable housing.”

The Bureau of Economic Analysis is scheduled on Thursday to release its advance estimate of economic growth in the second quarter and economists expect GDP growth to be negative for the second straight quarter.

Two consecutive quarters of economic contraction is commonly considered the technical definition of a recession, but the Biden administration is pushing back against that claim by arguing that other factors signal a strong economy, notably the 3.6 percent national unemployment rate.

Treasury Secretary Janet Yellen said in an interview on NBC’s “Meet the Press” over the weekend that the National Bureau of Economic Research weighs a broader set of indicators in deciding whether to declare a recession.

“We’ve got a very strong labor market,” she said. “This is not an economy that’s in recession.”

“A recession is a broad-based contraction that affects many sectors of the economy. We just don’t have that,” she said, pointing out that industrial output has grown five of the past six months and household balance sheets “are generally in good shape” even though “inflation is way too high.”

At the same time, Yellen acknowledged that economists are seeing a “slowdown” in the economy, including slowing job growth.

Slowing growth has Democrats concerned the Fed may wind up overshooting by raising rates too quickly before the midterm elections, when many voters will cast their ballots based on how they view the health of the economy.

Senate Democratic Whip Dick Durbin (Ill.) said he shares Warren’s concern.

“They’ve got to make a call as to how serious this is. I agree with her. If you overdo it, you could push yourselves into a recession,” he said.

Sen. Mark Warner (Va.), an influential Democratic voice on economic issues, said “I think there’s a way to thread this needle,” urging the Fed to adopt a measured approach to rein in inflation without hurting the economy.

“I’ve heard members of the Fed themselves express their concerns as well about overshooting,” he said.