Manchin takes on the Fed, rejecting Biden’s inflation defense

Sen. Joe Manchin on Thursday urged Federal Reserve Chair Jerome Powell to pare back economic stimulus to avoid stoking inflation, in a rare rebuke of the central bank by a Democratic lawmaker.

The West Virginia senator said in a letter to Powell that he is “increasingly alarmed” that the Fed continues to buy $120 billion in U.S. government debt and mortgage-backed securities each month even after Congress injected trillions of dollars of aid into the economy during the pandemic. The purchases help keep borrowing costs low as the Fed tries to coax the economy into full recovery.

“The record amount of stimulus in the economy has led to the most inflation momentum in 30 years, and our economy has not even fully reopened yet,” Manchin said. “I am deeply concerned that the continuing stimulus put forth by the Fed, and proposal for additional fiscal stimulus, will lead to our economy overheating and to unavoidable inflation taxes that hard working Americans cannot afford.”

Manchin's letter — the first example of a congressional Democrat urging the Fed to reverse course on current easy money policies — came as President Joe Biden weighed whether to reappoint Powell as chair of the central bank. It signaled potential opposition to Powell from the moderate wing of the party. It also represented a strong break with Biden's own economic team, which has tried to make the case that inflation will dissipate and Congress needs to pump trillions of more dollars into infrastructure and social spending.

Manchin said it was imperative to understand that economic rescue measures that were tailored for the Great Depression and Great Recession "may not be what is required for today’s economy and could result in higher than desired inflation if not removed in time."

Prices of goods and services rose more rapidly than expected this year as the U.S. economy reopened from Covid-19 lockdowns. Suppliers have struggled to keep up amid unexpectedly strong consumer demand as factories face pandemic-induced delays.

Fed officials and the Biden administration have said they expect price increases to slow next year as the economy returns to more of an equilibrium. Treasury Secretary Janet Yellen argued again this week that the greater risk was not doing enough to invest in the long-term health of the economy.

But Manchin doesn’t seem to be buying it.

While the amount of stimulus initially “met the moment of crisis,” Manchin told Powell that “it’s time to ensure we don’t overprescribe the patient by further stimulating an already strong recovery and therefore risk our ability to respond to future crises we are sure to face.”

Powell’s term at the helm of the Fed expires early next year. Biden is expected to make a decision on whether to keep him within the next few months to give markets plenty of time to digest the outcome.

Powell's take on inflation has largely been in lockstep with the president, but the Fed’s continued asset purchases have raised doubts among some lawmakers. The central bank itself signaled last month that it was getting closer to slowing those purchases, though markets don’t expect such a move for several months.

Manchin’s vote might not be crucial to secure reappointment for Powell if he is reappointed — the chair got 84 votes when he was first confirmed to that role — but the letter is one of the starkest criticisms of the central bank’s interest rate policies this year, on either side of the aisle.

The West Virginian previously raised concerns about the Fed’s easy money policies after the Great Recession, going so far as to vote against Yellen’s nomination as central bank chair in committee in 2013, though he supported her in a vote before the full Senate.

A Fed spokesperson said the central bank received Manchin’s letter and planned to respond.