The U.S. Senate Banking Committee Chair asked Federal Reserve Chairman Jerome Powell on Tuesday to exercise caution when tightening monetary policy so much that it causes millions of Americans already experiencing rising inflation to lose their jobs.
The letter, which was also written to the Fed’s Board of Governors and made publicly available by Brown’s office, reads, “While it is your duty to fight inflation, you must also keep in mind that you also have to make sure we have full employment. We must avoid the effects of aggressive monetary policy, especially when the Fed’s actions fail to address inflation’s primary causes, overwhelm our recent gains and robust labor market.”
At their meeting the following week, Fed policymakers are anticipated to announce their fourth consecutive supersized interest rate hike, pushing the policy rate to between 3.75% and 4% as part of the most significant series of rate increases in about 40 years.
Brown’s letter urged “continued caution” in light of the synchronized tightening of monetary policy by central banks around the world and other factors that pose the real possibility of worsening the global economic situation. Still, it did not specifically ask the Fed to stop or slow the rate hikes.
For his part, Powell has acknowledged these dangers and the possibility that increasing borrowing rates would result in a rise in unemployment, which is currently at a historically low 3.5%.
He has, however, also maintained that the only way to guarantee the durability of the labor market is to defeat inflation, which is currently running at over three times the Fed’s 2% target.
Brown’s letter to Powell is being published as his fellow Democrats fight to hold onto their slim Senate majority across the nation, with Brown’s home state of Ohio serving as one of the most carefully watched contests. The elections are held one week following the Fed meeting.
Republicans claim they would manage the economy better than Democrats and blame Democrats’ pandemic aid and other policies for high inflation. At the same time, Democrats blame rising prices on avaricious businesses and supply networks.
According to studies, both sky-high demand and supply limits are responsible for driving inflation, and Fed policymakers say they are dedicated to reducing it.
Brown’s letter is unlikely to change their minds, but they are anticipated to at least start discussing reducing rate increases when they meet on November 1-2.
Despite this and the fact that policymakers aim to avoid politics and assert that their efficacy depends on political independence, Brown’s letter highlights the political environment in which the Fed functions.
Interest rates and unemployment
Like the overall economy, interest rate hikes always affect the labor market. First off, higher interest rates often negatively impact consumer spending and corporate investment, resulting in less hiring and more unemployment.
Industries that generate expensive durable goods and those that depend on long-term finance will probably react to drastically higher interest rates more swiftly.
The construction industry will be one of the worst hits. Home prices have risen to historic levels, and the average 30-year fixed mortgage rate has doubled over the previous years. All other things being equal, higher mortgage rates are likely to discourage home purchases, resulting in a downtrend in home sales.
As real estate investment declines with rising rates, further cooling of the housing market would negatively affect construction industry recruitments. Companies would have to pause recruitment or even lay off some employees when fewer contracts are available.
While public infrastructure initiatives and other non-residential investments may temporarily fuel a sustained demand for laborers in the construction industry, they may not be enough to keep the sector afloat.
The manufacturing industry will also be affected. Rising rates make it more costly to finance expensive, long-lasting items like furniture and cars, which reduces demand. This will slow down production and make companies pause any expansion plans, resulting in fewer jobs.
In his letter, Brown said, “I kindly request that you remember your duty to encourage full employment and that the actions you make at the following FOMC meeting demonstrate your dedication to the dual mandate.”
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