Democrat: Fed ‘should cut interest rates’ or be ‘most responsible’ for Trump’s return

Rep. Ro Khanna (D-Calif.) urged Federal Reserve Chair Jerome Powell on Wednesday to “cut interest rates now” or risk guaranteeing the reelection of former President Trump.

“Powell should cut interest rates now given most of inflation was caused by supply shocks,” Khanna said in a post on X, formerly Twitter. “If he doesn’t, he may be the person most responsible for the possible return of Trump.”

Khana has been one of the most outspoken congressional critics of the Fed’s efforts to fight inflation through higher interest rates, arguing it would crash the economy into a recession.

Biden and Trump are almost certain to face each other in a rematch for the presidency next year in which the strength of the U.S. economy may play a critical role.

The Fed repeatedly raised interest rates over the past two years to tame sky-high inflation. Higher interest rates are intended to reduce inflation by slowing down the U.S. economy and curbing spending that would bid up prices for goods and services.

After holding rates steady for its past three meetings, Fed officials indicated earlier this month that they anticipate several rate cuts next year. All but three members of the panel in charge of deciding monetary policy forecast at least two rate cuts in 2024, while the largest share predicted three cuts.

The expectation of rate cuts comes as inflation has shown significant signs of improvement, with one key inflation metric falling below 3 percent. The personal consumption expenditures (PCE) price index fell to 2.6 percent year-over-year last month, while October’s PCE price index was revised down to a gain of 2.9 percent.

However, Khanna suggested inflation was largely caused by supply shocks, echoing comments from The New York Times columnist and economist Paul Krugman. He argued in a thread on Saturday that the recent easing of inflation is the result of conditions normalizing in the supply chain, rather than any action by the Fed.

“Yes, the Fed raised rates, but no sign of the mechanism (unemployment!) by which rate hikes are supposed to reduce inflation,” Krugman said on X. “The best case for the Fed is that it prevented possible overheating, which might have kept inflation high.”

The unemployment rate has remained surprisingly low, never crossing 4 percent, even as the Fed has raised interest rates to a two-decade high. Only 3.7 percent of Americans were jobless in November, according to the Labor Department.

“So the Fed may have done the right thing for the wrong reasons. Or maybe we’ll have a gratuitous recession bc of lagged effects,” Krugman added. “But ‘the Fed did it!’ is not a sustainable argument.”

However, Wall Street has grown increasingly confident in recent weeks that the U.S. economy has avoided the recession most economists were predicting last year and achieved a “soft landing,” as they look forward to the possibility of rate cuts next year.

The Fed, an independent federal agency, is likely to face intense political pressure as it attempts to achieve a soft landing amid the 2024 elections.

Powell, a Republican, has sought to keep the central bank above the political fray since Trump nominated him to the Fed chairmanship in 2017.

Trump waged an unprecedented public pressure campaign against Powell as the Fed hiked interest rates in 2017 and refused to cut them to near-zero levels amid the president’s trade war with China. Powell insisted throughout Trump’s presidency that neither he nor his Fed colleagues would yield to pressure from any politician.

Biden reappointed Powell as Fed chief in November 2021 as inflation crept higher, spurning the progressive lawmakers and activists who had called on him to appoint a more liberal chair.

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