Giving political cover to the Fed to tamp down on inflation. Which fits neatly into my theory.
By Wolf Richter for WOLF STREET.
Joe Manchin, Democratic Senator from West Virginia, sent a letter today to Fed Chair Jerome Powell in which he, after the required good-job and thanks-for-saving-the-universe-as-we-know-it, hammered on Powell to get off the money-printing binge that is causing “the most inflation momentum in 30 years.”
“With the recession over and our strong economic recovery well underway, I am increasingly alarmed that the Fed continues to inject record amounts of stimulus into our economy by continuing an emergency level of quantitative easing (QE) with asset purchases of $120 billion per month of Treasury securities and mortgage backed securities,” Manchin wrote.
“The Fed has sustained $120 billion per month in asset purchases since June 2020, despite increasing vaccination rates to combat the virus and additional fiscal stimulus from Congress in the ARP,” he wrote in the letter.
“The record amount of stimulus in the economy has led to the most inflation momentum in 30 years, and our economy has not even fully reopened yet,” he wrote.
“I am deeply concerned that the continuing stimulus put forth by the Fed, and proposal for additional fiscal stimulus, will lead to our economy overheating and to unavoidable inflation taxes that hard working Americans cannot afford,” Manchin wrote.
“I urge you and the other members of the Federal Open Market Committee to immediately reassess our nation’s stance of monetary policy and begin to taper your emergency stimulus response.”
“[I]t is imperative we begin to understand that long term policy responses tailored for an economic depression, like the Great Depression and Great Recession of 2008, may not be what is required for today’s economy and could result in higher than desired inflation if not removed in time.”
This letter – the fact that it was written at all and released – is interesting because Republicans in Congress have been hammering on Democrats for their efforts to pile massive fiscal stimulus spending on top of an already over-stimulated economy. Republicans have started to put Americans’ growing pain and misgivings about this surge of inflation, and the loss of the purchasing power of their labor dollar, at the feet of the Congressional Democrats.
Republicans are doing so not because they’re opposed to inflation or money printing, far from it, but for political reasons.
And now, the first big-name Democrat has given the Fed political cover to taper its asset purchases and tighten its monetary policy and tamp down on inflation so that inflation, and the damage it does to working Americans, won’t give Republicans a crowbar to derail the Democrats’ top spending priorities.
Manchin’s letter fits neatly into my theory, expressed in the illustrious WOLF STREET comments on July 29, when I wrote in reply to Marco, among other things:
“Biden is going to BEG Powell or successor to jack up interest rates to get this inflation under control. Inflation is going to mess with Biden’s agenda. People are going to get pissed. Maybe that’s what Powell is waiting for, that Biden begs him to act.”
So now we have the first such action. It’s not “beg.” It’s the terms “urge” and “imperative” and “increasingly alarmed” and “deeply concerned.”
My theory is – and Treasury Secretary Yellen foreshadowed this when she said on June 6 that higher interest rates would “actually be a plus for society’s point of view and the Fed’s point of view” – that the White House is fishing for tighter monetary policy, including (somewhat) higher interest rates, to tamp down on inflation in order to allow the deficit spending priorities to not be ripped apart by concerns over inflation. My theory may still be proven wrong, but Manchin’s letter was a quicker and bigger step in that direction than I’d expected.
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