Federal Reserve Chair Jerome Powell speaks to Congress

Federal Reserve Chairman Jerome Powell testifies during the Senate Banking, Housing, and Urban Affairs Committee hearing on June 22, 2022. (Photo: Tom Williams/CQ-Roll Call, Inc. via Getty Images)

Fed and Biden Face Warnings That Inflation Response Could Spur Painful Recession

"The economy is slowing," said former U.S. Labor Secretary Robert Reich. "There's no reason for the Fed to drive it into recession."

Amid growing evidence that the U.S. economy is cooling, experts and progressive lawmakers are warning that the Federal Reserve's drive to crush inflation at any cost--and President Joe Biden's acceptance of the central bank's approach--risks ushering in a damaging recession and throwing millions of people out of work.

The Fed, chaired by Jerome Powell, has made clear in recent months that it is hellbent on reining in price increases even as top officials publicly admit that interest rate hikes--the central bank's primary tool to constrain economic demand--won't affect gas and food prices, two of the main drivers of inflation in the U.S. and around the world.

"There's a good chance the Fed's inflation-fighting campaign will cause, or help cause, a recession."

Later this month, the Fed is expected to announce its second consecutive rate increase of 75 basis points despite data suggesting that the U.S. may already be in a recession.

The Atlanta Fed's economic growth tracker estimates that the nation's gross domestic product (GDP) contracted 1.9% in the second quarter, which would mark two straight quarters of slowing growth--commonly considered a recession signal. Wage growth, which Powell has said he is targeting, has also slowed markedly.

The federal government's initial estimate of second-quarter GDP is expected on July 28--a day after the Fed's upcoming policy meeting. Additionally, the U.S. Bureau of Labor Statistics is expected to release closely watched Consumer Price Index (CPI) figures for the month of June next week--data that could impact the Fed's rate-hike decision.

"The economy is slowing," former U.S. Labor Secretary Robert Reich tweeted Thursday. "There's no reason for the Fed to drive it into recession."

While Powell has said it's not the Fed's intention to cause a downturn, he has acknowledged that aggressive rate hikes could spark a recession--a trade-off the central bank chief has suggested he's willing to make in his bid to fight off surging prices.

But in a column on Wednesday, New York Times economics writer Peter Coy noted that "inflation is already showing signs of moderating" and "the economy is losing steam, in part because of the rate increases that have already occurred."

"There's a good chance the Fed's inflation-fighting campaign will cause, or help cause, a recession," Coy warned, pointing out that
"economic output shrank in the first quarter at an annual rate of 1.6%" and "incomes aren't rising rapidly enough to keep up with prices, so consumers are losing spending power."

"While Americans hate inflation," Coy added, "there's also mounting worry about its opposite, deflation, which is a broad-based decline in prices and incomes that's usually a symptom of economic weakness and rising joblessness."

Dean Baker, senior economist at the Center for Economic and Policy Research, voiced agreement with Coy and criticized the "huge recession-promoting faction in the media."

In the face of warnings that the Fed's actions are propelling the U.S. economy toward a painful economic downturn, progressive members of Congress are reportedly becoming increasingly dismayed by the Biden administration's passive response.

In a Wall Street Journalop-ed in late May, Biden--who renominated Powell last year--wrote that he agrees with the central bank's "assessment that fighting inflation is our top economic challenge right now."

Politico reported Thursday that some lawmakers and members of Biden's administration "fear that the administration's unswerving support for the Federal Reserve's campaign to choke off inflation will slam the brakes on the economy and undercut the few things the White House has moving in its favor," pointing specifically to low levels of unemployment.

"Some progressives," the outlet noted, "want the president to come down much harder on what they view as corporate America's role in artificially jacking up prices to fatten profits."

Recent polling data indicates that such an approach would be overwhelmingly popular with U.S. voters. It would also be effective in driving down prices, according to recent research showing that corporate profits have had a disproportionate impact on inflation.

Rep. Pramila Jayapal (D-Wash.), chair of the Congressional Progressive Caucus, told Politico on Thursday that the central bank "should be very, very careful about increasing interest rates because we are already seeing some easing in inflation."

"It would be a tragedy," she added, "to see [recent labor market gains] thrown off into recession."

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In a blog post last week, Josh Bivens of the Economic Policy Institute argued that "the near-panic and damaging exhortations that the Federal Reserve should push the economy to the brink of recession in the name of fighting inflation" are "unwarranted, and the Federal Reserve should not feel free to ratchet up interest rates without regard to the risk of recession."

Bivens stressed that "the main channel through which higher interest rates will put downward pressure on prices runs through a softer labor market (higher unemployment) reducing growth in labor incomes, which reduces demand and reduces pressure on prices from the cost side as well."

"Using aggressive contractionary monetary policy to squash wage growth even more will put a huge burden on workers to restrain inflation--when they have been the primary victims of it so far," Bivens wrote. "Further, this strategy will leave all the other determinants of inflation--which actually are contributing to its above-normal level--largely untouched, until at least a pronounced slowdown or recession results."

"The Fed should instead lay out some real guideposts for how they think their rate increases will slow economic activity and what would constitute an excessively fast deceleration of growth," he added. "In short, they should know that unless wage growth really does become a key amplifier of inflation, then a Fed-induced recession will be seen as a clear policy error and there should be no preemptive permission to make this mistake."

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