Senator Joe Manchin of West Virginia is taking the Federal Reserve to task over inflation.
Manchin wrote a letter to Fed Chairman Jerome Powell on Thursday, urging him to reverse course and remove stimulus support for the economy before it overheats.
“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,” the moderate lawmaker from West Virginia wrote.
Manchin credited Fed policies as “instrumental” in preventing a long-term economic crisis caused by Covid. He did, however, urge Powell and other Fed officials to reduce the central bank’s monthly bond purchases, which total $120 billion.
“It is imperative we begin to understand that long term policy responses tailored for an economic depression,” Manchin wrote, “may not be what is required for today’s economy and could result in higher than desired inflation if not removed in time.”
Manchin’s criticism was not limited to the Federal Reserve. The Democrat said he is “deeply concerned” that the Fed stimulus, on top of proposals for additional fiscal stimulus, “will lead to our economy overheating and to unavoidable inflation taxes that hard working Americans cannot afford.”
The Federal Reserve has received the letter and intends to respond, according to a Fed spokesperson.
Consumer prices rose at the fastest annual rate since 2008 in June, prompting the criticism. Everything has become more expensive, from used cars and airfare to laundry machines and bacon.
This bout of inflation, according to the Fed, the White House, and many economists, will pass as supply catches up to surging demand and the economy returns to normal, or something close to normal.
“We won’t have an extended period of high inflation,” Powell said at a press conference on July 28. “We think that some of it will fall away naturally as the process of reopening the economy moves through.”
Powell, whose term ends in February, acknowledged that prices “could take some time” to fade. Powell stated that if inflation expectations become out of whack, the Fed will not hesitate to intervene.
The Fed’s task is made more difficult by the Delta variant, which may lower inflation in the short term but exacerbate supply chain problems in the medium and long term.
‘They must exercise caution.’
Manchin’s concerns about inflation and Fed policy are shared by some Wall Street CEOs and strategists.
CEOs of JPMorgan (JPM) and BlackRock (BLK) have recently stated that they do not believe inflation will be temporary.
The eye-popping July jobs report bolsters the argument that the economy does not require immediate Fed stimulus. Last month, the US added 943,000 jobs, the most since last summer, according to the report.
In a note, Rick Rieder, BlackRock’s global fixed income chief investment officer, wrote that Friday’s jobs report shows the economy is “very close” to full employment and may be at risk of “overheating” in some areas. He urged the Federal Reserve to start reducing its bond purchases.
“The Fed has done a very admirable job in guiding policy through the pandemic period,” Rieder wrote, “but they need to be careful at this stage not to inadvertently undermine much of that progress.”
