Democratic Lawmakers Urge Fed Chair Not to Raise Interest Rates

Sen. Elizabeth Warren (D-Mass.) on Capitol Hill in Washington, on June 22, 2022. Elizabeth Frantz/Reuters

In a letter to Federal Reserve chair Jerome Powell, a group of lawmakers urged the central bank to stop raising interest rates to avoid additional damage to the U.S. economy.

Ten senators and representatives, led by Sen. Elizabeth Warren (D-Mass.) and Rep. Pramila Jayapal (D-Wash.), expressed concern about the Fed’s current monetary-policy initiatives and how these tightening efforts could engineer a recession.

“We write regarding our concern about the Federal Reserve’s monetary policy strategy and its potential to throw millions of Americans out of work,” they wrote in a May 1 letter, adding that an “overreaction” could leave the economy more “vulnerable.”

“We strongly urge you to respect the Fed’s dual mandate, pause your rate hikes, and avoid engineering a recession that destroys jobs and crushes small businesses.”

The U.S. officials argued that recent economic data suggest that additional rate hikes would be “unnecessary” and “needlessly threaten” the economy’s progress. They acknowledged the Fed’s policy independence, but noted that continuing to pull the trigger on rate hikes would abandon the institution’s dual mandate of price stability and maximum employment.

“While the Fed should remain flexible to incoming data as it assesses the economy’s progress toward achieving lower inflation, the evidence to date suggests that progress can continue to be made without slamming the brakes on the economy and costing millions of Americans their jobs,” the lawmakers said.

On the floor at the New York Stock Exchange as the Federal Reserve chairman Jerome Powell speaks after announcing a rate increase in New York, on Nov. 2, 2022. Seth Wenig/AP Photo

The letter, which also featured Sen. Bernie Sanders (I-Vt.), was sent to Powell ahead of the much-anticipated Federal Open Market Committee (FOMC) policy meeting on May 2–3.

According to the CME FedWatch Tool, the Fed is expected to raise interest rates by a quarter-point, lifting the benchmark federal funds rate to a range of 5.00–5.25 percent. Investors anticipate the central bank leaving rates high and then begin cutting later this year in response to slowing economic growth.

This would be the central bank’s tenth increase to the policy rate. Since its tightening cycle started in March 2022, the Fed has raised rates by 475 basis points.

To Pause or Not to Pause

With the annual inflation rate slowing every month since hitting a peak of 9.1 percent in June, many economists and market analysts have advocated for the Fed to hit the pause button.

Jeremy Siegel, a professor of finance at the Wharton School of the University of Pennsylvania, for example, told CNBC in November 2022 that the Fed should stop raising rates because it was relying on lagged economic data.

“The danger was being too tight, not too loose. The Fed rhetoric—higher for longer—really would guarantee a recession,” he said. “I think it’s the day of reckoning is sooner.”

In March, Mohamed El-Erian, an advisor for Allianz and Gramercy and president of Queens College, recommended the central bank pause its rate hikes in the aftermath of the failures of Silicon Valley Bank and Signature Bank.

“I suspect the least bad is a pause,” the top economist told CNBC. “After the hikes we’ve seen, make sure that the financial contagion is behind us. And then try to assess the economic contagion, which is harder to counter with policy.”

Minutes from the March FOMC policy meeting revealed that several Fed officials considered a rate pause.

“Several participants noted that, in their policy deliberations, they considered whether it would be appropriate to hold the target range steady at this meeting,” the minutes stated. “They noted that doing so would allow more time to assess the financial and economic effects of recent banking-sector developments and of the cumulative tightening of monetary policy.”

But Fed governor Christopher Waller thinks rates need to be higher to achieve the central bank’s inflation fight, adding that investors should not anticipate rates to ease anytime soon.

“Monetary policy needs to be tightened further. How much further will depend on incoming data on inflation, the real economy, and the extent of tightening credit conditions,” Waller said in a speech at the Graybar National Training Conference in San Antonio, Texas, in April.

“Monetary policy will need to remain tight for a substantial period of time, and longer than markets anticipate.”

Goldman Sachs analysts believe the FOMC will “signal” a June pause, but also “retain a hawkish bias.”

Northern Trust economists think the Fed will “lay the groundwork for a pause, and push back against an early pivot.”

“We expect the Federal Reserve to raise overnight rates by a quarter-point next week,” they wrote in a note. “To acknowledge the deceleration of inflation and lingering anxiety about the financial system, the message accompanying the move will likely be somewhat dovish.”