Liberals Turn Up the Heat on the Fed
When Federal Reserve Chair Janet Yellen visited Cleveland in July, Ohio Sen. Sherrod Brown accompanied her at a couple of events and used the opportunity to make a suggestion: Be cautious about hiking interest rates.
“It’s about raising wages and about creating jobs,” Brown, a liberal who’s the ranking member on the Banking Committee, told POLITICO. Brown and Maxine Waters of California, the senior Democrat on the House Financial Services Committee, also wrote to Yellen last month urging the Fed to consider “the many minority communities that have yet to reap gains from the recovery" before increasing borrowing costs.
As the Federal Reserve nears a decision Thursday on whether to raise rates for the first time in nine years, Yellen and her team are facing mounting political pressure to hold off — not just from economists concerned about risks abroad and market turmoil, but also from progressives who say the central bank has a duty to address economic disparities by keeping interest rates low. In a reflection of the populist wave sweeping national politics, Senate and House Democrats are stepping up their calls for the Fed to resist a rate increase, bolstered by an intensifying campaign waged by labor and community groups.
In an increasingly vocal effort that they’ve dubbed Fed Up, activists have been lobbying lawmakers and Fed officials, including Yellen. They have started showing up at the Fed’s annual retreat in Jackson Hole, Wyo., wearing shirts that read, “What Recovery?” They even reached out to The New York Times editorial board, which on Labor Day came out against a rate hike on the grounds that worker pay is stagnating.
The Democratic lawmakers who’ve been urging caution may have a second motivation: Any move by the Fed to raise rates could dampen the economy just as their party is trying to hang onto the White House in 2016.
At the same time, there is a strong countervailing view among some economists that the central bank has already waited too long to begin tightening the flow of credit, risking inflation and threatening financial stability. And there’s a view that the Fed is above politics and shouldn’t be lobbied.
None of that is deterring the progressives.
“One of the lessons banking regulators learned from the Financial Crisis is to 'do no harm,'" said Rep. Keith Ellison (D-Minn.), co-chair of the Congressional Progressive Caucus. "If the Federal Reserve acted now — when Republicans are threatening another government shutdown, investors are spooked by market volatility, and wages remain too low — we’d be risking greater unemployment and hindering our economic recovery. These are the right reasons to push back on the 'craze to raise' because we need to lower unemployment and promote economic expansion.”
The pressure is particularly intense on Yellen, who owes her job in part to the support of liberals such as Brown who backed her over former Treasury Secretary Larry Summers two years ago.
"I was excited when she was nominated," Fed Up campaign director Ady Barkan said, adding that this is "a huge moment for her to display real leadership."
Before recent market volatility raised new questions about the Fed's outlook, Yellen had made clear in public statements that a rate hike was likely sometime this year as the unemployment rate approached 5 percent and inflation remained at bay. Close observers of the central bank pegged the September Federal Open Market Committee meeting as the most likely time for an increase.
But wild market swings in late August amid fears of an economic slowdown in China helped muddy the picture. And the economy added fewer jobs than expected last month. The Fed's mandate is to wield monetary policy to achieve maximum employment and stable prices.
"The jobs picture says yes," said Brookings Institution senior fellow and former Federal Reserve Vice Chairman Donald Kohn. "The inflation picture and some of the financial market developments say no. It's a very close call."
"Before the FOMC increases the federal funds rate, it should assess the impact that such an increase would have on wages, living standards and employment, particularly for minority populations," they wrote.
Hill Democrats aren't alone in their read of the economy. There's also concern among advisers to President Barack Obama that the recovery hasn't reached enough Americans. One senior administration official, careful to avoid the appearance of meddling with the Fed and speaking on the condition of anonymity, said the benefits of the recovering economy aren't flowing as much as they should to the wages of middle- and lower-income workers.
"I do not see a compelling reason for liftoff," said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities and the former chief economist for Vice President Joe Biden.
Populist criticism of the Fed has a long history in Congress and among Democrats, especially in the leadup to an election.
"The political pressure is more intense when you're raising rates or not lowering them as rapidly as some people think they should because from their perspective it's all about jobs," Kohn said.
But despite the pushback on a rate increase today, many Democrats now in office will likely continue to defend the Fed against Republicans in control of Congress. Brown and Waters this year have voted against Republicans' Fed reform bills that would intervene to varying degrees in how the central bank makes monetary policy. Brown opposes the "Audit the Fed" proposal from Sen. Rand Paul (R-Ky.), though he has put pressure on the Fed to step up regulation of banks it supervises.
A rate increase is not going to affect Yellen’s standing among Democrats, Keefe, Bruyette and Woods Washington policy analyst Brian Gardner said. "For a lot of members, they will be playing to their own constituencies and their own audience,” he said. “It will be less for an effect on the Fed as it will be for an effect with constituency groups that they care about."
"Let's face it — there's going to be a lot of political posturing on both sides, no matter what."
Republicans in Congress, who have long advocated for the Fed to get out of the business of intervening in the markets by keeping rates low and by buying bonds, still aren't likely to rush to Yellen's defense if she votes to raise rates this week. Top Republicans who help oversee the Fed aren't banking on a rate increase this month, and they don't expect the decision will have a big impact on their relationship with the central bank chair.
"It would be probably Pollyannaish to think that the Fed doesn't feel pressure one way or the other - whether they act on it or not is something else," said Rep. Bill Huizenga (R-Mich.), who chairs a House subcommittee focused on monetary policy. "Clearly you've seen more of an assertion by some of the more dovish, liberal FOMC members to maybe follow the advice of The New York Times editorial board than what they think is the right thing to do for the economy."
That’s exactly why liberals are pressing their case so publicly.
"It seems weird you have to lobby an institution like the Fed," said Josh Bivens, research and policy director at the Economic Policy Institute, one of the groups behind Fed Up. "But the Fed is a real-world institution and they have a lot of cross-pressure coming from loud, influential voices who want a rate increase. To my mind the arguments coming from those loud, influential voices are flawed and not based on a good reading of the data. But if we stay silent they could well carry some influence."