Lawmakers warn that the Federal Reserve’s continued high interest rates are worsening the housing shortage and threatening job growth, calling for immediate action to lower rates.
Democrats in Congress are urging the U.S. Federal Reserve to cut 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. This call to action comes ahead of the Federal Open Market Committee’s (FOMC) two-day policy meeting, where significant decisions regarding the nation’s economic strategy will be discussed.
In a letter to Fed Chair Jerome Powell, a trio of Democratic senators, led by Sen. Elizabeth Warren (D-Mass.), expressed deep concern over the Fed’s 11 rate hikes since March 2022. They argued that these increases 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 senators highlighted the severe housing shortage facing the country, exacerbated by the Fed’s refusal to lower interest rates. “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,” the letter stated.
Supporting this view, Sen. Sheldon Whitehouse (D-R.I.) and Rep. Brendan Boyle (D-Pa.) echoed their colleagues in a separate letter to Powell. They emphasized that elevated interest rates “exacerbate” the 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.” They also warned that “keeping rates higher for longer will do nothing to solve the housing crisis.”
The lawmakers pointed out that the U.S. economy has been performing well, with May marking the 40th consecutive month of job growth. However, they cautioned that the Fed’s high interest rates could jeopardize this progress. “The U.S. economy has achieved an apparent soft landing with inflation falling sharply and continued steady job growth,” Whitehouse and Boyle noted. “Lowering rates now will ensure that we do not cause unnecessary and harmful economic damage.”
Powell, initially appointed by former President Donald Trump and renominated by President Joe Biden in 2021, has made it clear that the Fed is targeting the U.S. labor market, specifically workers’ wages, to bring inflation back down to its 2% target. Despite wage growth slowing substantially, the labor market remains resilient against the backdrop of Fed rate hikes.
Economists anticipate the Fed might start cutting rates this year, but the minutes from last month’s FOMC meeting suggested that officials support keeping interest rates elevated for longer than expected. Moody’s Analytics chief economist Mark Zandi and Parrott Ryan Advisors co-owner Jim Parrott, in an op-ed for The Washington Post, warned that this 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,” they wrote.
The current housing shortage is critical, with rising mortgage rates discouraging new home sales and development. Data show that high mortgage rates are preventing many existing homeowners from selling their properties, further reducing the supply of homes and driving prices higher. Experts argue that lowering interest rates would stimulate the housing market by making mortgages more affordable, thereby increasing the supply of available homes and reducing overall housing costs.
Moreover, the job market, which has shown remarkable resilience, could face significant challenges if high interest rates persist. Businesses have already started to pull back on hiring, reduce employees’ hours, and rely less on temporary workers. While layoffs have been relatively low, the ongoing high interest rates could change this trend, leading to higher unemployment rates and slower economic growth.
The Federal Reserve’s stance on maintaining elevated interest rates has drawn criticism from various quarters. Critics argue that the focus on inflation control through high rates is outdated and does not account for the unique economic conditions post-pandemic. They suggest that alternative measures, such as addressing supply chain disruptions and curbing corporate profiteering, would be more effective in managing inflation without harming the housing market or job growth.
The call for immediate rate cuts by Democratic lawmakers is a plea to balance inflation control with economic stability. They argue that the Fed’s current policy is not only ineffective in curbing inflation but is also causing significant harm to the housing market and job growth. Lowering interest rates, they believe, would provide much-needed relief to the housing market, encourage home sales, and sustain the momentum of job growth.
“Lowering rates now will ensure that we do not cause unnecessary and harmful economic damage,” stated Sen. Sheldon Whitehouse and Rep. Brendan Boyle in their letter to Fed Chair Jerome Powell, encapsulating the urgency of the situation. The upcoming FOMC meeting will be crucial in determining the direction of U.S. economic policy and addressing the pressing issues highlighted by lawmakers and economists alike.
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