Senator Joe Manchin Expresses Concerns Over Fed's Policies and Inflation
As the U.S. economic recovery gains momentum, Senator Joe Manchin (D-WV) is growing increasingly concerned about the Federal Reserve's (Fed) continued supply of economic stimulus and the potential for an overheated economy. He penned a letter to Fed Chairman Jerome Powell on Thursday, urging the central bank to reverse course and halt quantitative easing before it sparks an economic boom.
Manchin's concerns extend beyond the Fed's policies. He is "deeply concerned" that the Fed's stimulus measures, coupled with proposed additional fiscal incentives, may contribute to an overheating of the economy and an eventual inflation tax that working-class Americans cannot afford.
The economic recovery in the U.S. has been steady, with strong growth and a downturn in the recession. However, Manchin is wary of the Fed's record-breaking monetary policies, which he believes might overshoot and ignite an economic bonfire.
Manchin contends that the Fed's actions can help prevent a long-term economic crisis triggered by the new coronavirus pandemic. Nevertheless, he called on Powell and his Fed colleagues to reconsider their monthly securities purchases worth $120 billion.
Manchin asserts that prolonged political reactions to the economic crisis may not be the appropriate solution for the present-day economy, and they could fuel an unwanted surge in inflation if not addressed in a timely manner.
Fed spokesperson confirms receiving the letter, with plans to respond in due course.
Inflation: Here to Stay...For How Long?
This concern comes following consumer prices, including used cars, airline tickets, washing machines, and bacon, experiencing rapid increases in June, the fastest pace since 2008.
The Fed, White House, and several economists anticipate that this inflation will be temporary and dwindle as supply catches up with demand, and the economy returns to normal or near-normal levels.
Fed Chairman Jerome Powell mentioned at a press conference on July 28 that the Fed does not expect prolonged periods of higher inflation. He believes that some portion of the inflation will naturally evaporate as the economic recovery progresses.
Despite Powell acknowledging that it might take some time before prices decline, he assured that the Fed would not hesitate to intervene if inflation expectations drifted out of control.
The Fed's role is further complicated by the Delta variant, which could curtailed inflation in the short term but may create difficulties in the supply chain in the medium- to long-term.
Be Cautious
Several CEOs and Wall Street strategists share Manchin's concerns about inflation and the Fed's monetary policies.
JP Morgan (JPMorgan Chase) CEO Jamie Dimon and BlackRock (BLK) CEO Larry Fink recently expressed doubts about the short-term nature of inflation.
The July jobs report strengthened the belief that the U.S. economy does not require any further stimulus from the Federal Reserve – which typically contributes to inflation. The report revealed that the U.S. created 943,000 jobs in the last month, marking the highest such figure since the previous summer.
Rick Rieder, Chief Investment Officer for globally fixed-income securities at BlackRock, wrote in a note that the jobs report showed that the U.S. economy is "very close" to full employment, and that in certain sectors, there is a risk of overheating. He urged the Fed to start reducing its bond purchases.
Rieder highlighted the Fed's significant role in steering the economy during the pandemic, but emphasized the importance of avoiding inadvertently weakening the gains made thus far.
Manchin's fears of fiscal incentives are not reflected in the Biden administration's $4 trillion "Build Back Better" plan. While this plan does not constitute short-term economic support, it involves long-term investments in infrastructure, childcare, and worker training – all of which have the potential to contain inflation and boost productivity.
Mark Zandi, Chief Economist at Moody's Analytics, wrote in a recent report that concerns about the plan leading to unwarranted inflation and an overheated economy are unfounded. He stated that a significant portion of the additional fiscal support is aimed at enhancing future economic growth potential and reducing inflationary pressure.
