Dems call for immediate rate cuts as Fed policy worsens U.S. housing crisis
Democrats in Congress urged the U.S. Federal Reserve on Monday to begin cutting interest rates immediately, warning that the central bank's restrictive monetary policy is worsening the nation's housing crisis and threatening to derail a strong streak of job growth.
In a letter to Fed Chair Jerome Powell ahead of the Federal Open Market Committee's (FOMC) two-day policy meeting that begins Tuesday, a trio of Democratic senators led by Sen. Elizabeth Warren (D-Mass.) wrote that the central bank's 11 rate hikes since March 2022 are "having the opposite of [their] intended effect" by "driving up housing and auto insurance costs, which are currently the main drivers of the overall inflation rate."
"The country is already facing a severe housing shortage, and the Fed's refusal to bring down interest rates is exacerbating this shortage and driving higher inflation rate," the senators wrote. "Lower mortgage rates would encourage more people to sell their homes, which would in turn increase housing supply, decrease prices, ease the costs of renting, and ultimately increase homeownership."
Sen. Sheldon Whitehouse (D-R.I.) and Rep. Brendan Boyle (D-Pa.) echoed their colleagues in a separate letter to Powell on Monday, writing that elevated interest rates "exacerbate" the nation's housing supply crisis by "increasing the costs to develop new housing while discouraging existing homeowners from upgrading to larger homes—shrinking the supply of starter homes available to the next generation of homebuyers."
"Keeping rates higher for longer will do nothing to solve the housing crisis," added Whitehouse and Boyle, respectively the chair of the Senate Budget Committee and the ranking member of the House Budget Committee.
The two lawmakers also expressed concern that "excessively tight monetary policy may jeopardize the strong job market that the U.S. has enjoyed over the last several years."
"The U.S. economy has achieved an apparent soft landing with inflation falling sharply and continued steady job growth," Whitehouse and Boyle wrote. "Lowering rates now will ensure that we do not cause unnecessary and harmful economic damage."
Powell, first appointed to his post by former President Donald Trump and renominated by President Joe Biden in 2021, has explicitly said the Fed is targeting the U.S. labor market—specifically workers' wages—as part of its effort to bring inflation back down to its arbitrary 2% target.
While wage growth has slowed substantially, May marked the 40th consecutive month of U.S. job growth and the labor market has remained strong in the face of Fed rate hikes, which progressives have criticized as the wrong tool to rein in price increases fueled largely by pandemic-related supply chain disruptions and rampant corporate profiteering.
Economists expect the Fed to begin cutting rates this year, but the minutes of last month's FOMC meeting suggested that Fed officials support keeping interest rates elevated for a longer period than expected.
In an op-ed for The Washington Post last week, Moody's Analytics chief economist Mark Zandi and Parrott Ryan Advisors co-owner Jim Parrott argued that approach could be disastrous.
"The economy has weathered the Fed's higher-for-longer strategy admirably well, but there is a mounting threat that the ongoing pressure will expose fault lines in the financial system," Zandi and Parrott wrote. "As last year's banking crisis showed, the relentless strain of high rates can cause parts of the financial system to buckle in ways that are difficult to predict and control."
"The job market also appears increasingly fragile, as businesses have pulled back on hiring, cut employees' hours and are using fewer temp workers. They have been loath to lay off workers, but that could quickly give way under the increasingly heavy weight of high interest rates," they added. "There is no reason to take these risks for the sake of hitting a flawed inflation target. Better for the Fed to recognize its hard-fought win against inflation and begin, finally, to cut interest rates."
